The latest attempt by the Centre to roll out the proposed Goods and Services Tax (GST), a uniform, pan-India tax on goods and services which will replace the current mix of State and Central taxes, has floundered on the same old issues. The meeting between Finance Minister Arun Jaitley and the empowered committee of State finance ministers failed to evolve a consensus on the issues of compensation to be paid to States for the loss in their revenues after the elimination of Central Sales Tax (CST) on inter-State movement of goods (which is actually collected by concerned State at the point of origin and utilised by it), taxes levied on petroleum products at the State level, and entry taxes, including entry taxes levied by municipal bodies. On the issue of compensation, the primary roadblock has been the trust deficit between the Centre and the States. With the previous Finance Minister having gone back on his commitment to compensate the States for the cut in CST — for both fiscal and political reasons — one can understand the wariness on the part of the States to accept the current Finance Minister’s word at face value. That, however, is easily remedied. By including the compensation clause in the proposed GST Bill — and thus making a constitutionally binding commitment — the Centre can easily bring the States on board. The issue of whether the compensation is to be paid for three years, as offered by the Centre, or five as a few States are demanding, is something that can be ironed out.

Less easily fixed are taxes on petroleum products and entry taxes, which are reflective of a deeper underlying problem — overdependence on low hanging fruit on the part of States. Taxes on alcohol and petro products together account for nearly two-thirds of total revenues for most States. These are easy to collect, are more or less price inelastic and have inbuilt buoyancy. The same goes for entry taxes, where States have to do little more than set up a collection point. But such taxes are retrograde since they impact core input items, have a cascading effect and greatly increase transaction costs and delays. Estimates show that replacing these with GST could immediately add upwards of one percentage point to the GDP growth rate. As the experience with replacing local sales tax with Value Added Tax (VAT) has shown, reducing barriers and easing tax administration leads to greater growth and boosts total tax revenues much faster.

States need to realise that blocking the introduction of GST hurts their interests more than that of the Centre in the long run. A uniform rate will also remove tax arbitrage, currently used by States against each other. This will allow the better governed States to compete more equally, while acting as an incentive for others to improve infrastructure and ease of doing business. This is a win-win for all, and it is high time the States resiled from their stubborn positions.

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