With less than six months to go, there is considerable concern that the Congress-led United Progressive Alliance will not be able to deliver on its promise of implementing a single goods and services tax (GST) by 1 April. Not without reason. In the last two months, we have gone from a situation of no return with the state governments effectively checkmating the Centre’s proposal by proposing a three-tier GST and then pulling back from the brink last week.
That the states are willing to rethink is a good sign. The GST is the single biggest tax reform initiative since 1991, when the then Congress government had embarked on an accelerated phase of reforms. It will, among other things, ensure equitable sharing of the tax burden among manufactured goods and services (at present, while services accounts for 55% of the gross domestic product, its share in tax revenues works out to a little over 10%); lower the tax rate, encouraging compliance and widening the tax base; and, most importantly, unify the country into one single market—a powerful notion that would also work as a very effective political glue.
Vijay Kelkar, chairman of the Finance Commission, in an address in Bangalore on Monday, has provided a fresh quantification of the gains to the Indian economy. According to him, an effective implementation of GST would push up the country’s growth rate by an additional 2-2.5% and of exports by 10-14%. Kelkar has worked out the net present value of this tax reform at a staggering $0.5 trillion, provided there is no substantive deviation from what he described as a “flawless” GST—which would subsume all the major state-level taxes, use a single rate, allow for only essential exemptions and eliminate all barriers to trade.
Illustration: Jayachandran / Mint
Most state governments are convinced of the in-principle advantages of a GST, but baulk at the thought of incurring revenue losses in the transition and at the same time paying the political price of giving up their right to tax. These are legitimate fears and the Centre needs to provide the right assurances.
Now, the Finance Commission—which has a stake in the debate since one of its terms of reference is GST—has offered to lend a helping hand by providing compensation to states suffering a revenue loss, provided, of course, they went through with the so-called flawless model.
A significant reassurance that would hopefully nudge the reluctant among the flock to make the leap of faith.
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