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The slow death of tax reforms

The slow death of tax reforms
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First Published: Mon, Jan 24 2011. 08 44 PM IST
Updated: Mon, Jan 24 2011. 08 44 PM IST
On Monday, Union finance minister Pranab Mukherjee admitted that it would take some more time for the goods and services tax (GST) regime to come into effect. Part of the reason would appear to be procedural; the Constitution needs to be amended, and that could take time. And part of the reason is that the Centre and the states are yet to see eye to eye on the new unified tax structure. Indeed, even before the minister’s statement on Monday, no one thought the 1 April deadline would be met (just like 1 April 2010 wasn’t). There are also significant IT issues related to the implementation of the GST, but talk of this seems premature at a time when there is still no clarity on the structure of the tax.
It is possible that when (and if) the GST becomes a reality, it will be far removed from the unifying tax regime that was originally conceived. Given the tenor of the negotiations between the states and the Centre, it is evident that the regime will be nuanced with several exceptions and exemptions that could weaken the initial idea of doing away with varying tax rates across the states, which made it exceedingly difficult to move goods across state borders and, as a result, influenced where companies put down plants or warehouses.
The GST was one of two ambitious tax reforms India undertook in the mid-2000s. The other was the direct taxes code (DTC), which, again, sought to do away with exemptions and exceptions, and enshrine tax rates in a code. This code, in a diluted form, is expected to come into effect from 2012.
Between them, the GST and DTC were expected to introduce some element of stability in India’s tax regime. The country has moved well away from the 1980s and 1990s when both the direct and indirect tax structure were a function of the whims of the finance minister of the day (who could change both in section B of his budget speech), but there is still some amount of instability about both. Both the direct and the indirect tax regimes are also very complex. It was this complexity that the GST and DTC sought to address.
At one level, complexity increases cost of compliance for companies. At another, classification and interpretation become important and both could result in some loss (in terms of unpaid tax revenue) to the exchequer. This newspaper has long held that a simple, stable (and, perhaps, more generous) tax regime can only increase tax compliance and boost the government’s takings.
Has the government lost the plot on the GST and DTC? Tell us at views@livemint.com
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First Published: Mon, Jan 24 2011. 08 44 PM IST