For the last few years, the Centre and the states have been engaged in a jab and parry routine ahead of introducing a goods and services tax (GST) in the country. While they are agreed in principle that the country needs to graduate to a GST after having already implemented the value-added tax (VAT) regime, they differ on the structure as well as what the rate should be.
This unwelcome status quo was broken on Tuesday, when the 13th Finance Commission (TFC) put out the report of its task force on the ideal GST structure and voted for a flat rate of 12%, which it believes is a revenue-neutral rate.
The findings, based on a comprehensive study, are significant for several reasons. Not only does it move the ball forward on the GST debate, it has for the first time provided an empirical framework to conduct a debate. Further, given its constitutional status (the authority that decides the tax share between states and the Centre at one level and among states at another), there is an implicit sense of fairness in the proposal.
Illustration: Jayachandran / Mint
Further, TFC is not handicapped by a revenue perspective —which is at the bottom of the differences between the Centre and the states—and instead views the entire episode from the advantage of being outside yet involved; something akin to the third umpire in cricket. TFC views the introduction of what it defined as a “flawless” GST as a reform stimulus—that will not only improve productivity in the economy but also boost national income by as much as 1.6% every year.
At the same time, it has been cognizant of the revenue concerns and allowed for the creation of a compensation fund to be paid out in the event of revenue losses. This is just a safety net according to TFC, which has approached the subject through five different methods that actually generates a rate of 11%, but preferred to err on the side of caution.
Predictably, the flat rate has been challenged by the states which, in their desire to protect their revenue, have proposed a dual rate structure—one for all goods and another, substantially lower, for the so-called mass consumption goods. This was fine till such time that there was no basis to claim otherwise.
So the least the Centre and the states can do is to generate a honest debate and not attempt to short-circuit a reform initiative that will for the first time economically unify the country and provide a level playing field to the Indian industry.
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