Smooth road

Smooth road

Asingle national market will soon replace the current patchwork quilt of localized markets, if the goods and services tax (GST) is introduced in 2010, as planned. Such a single market should pay off in terms of higher economic growth and efficiency. Companies will also benefit as the easier flow of internal trade from leads to fewer logistical nightmares.

Last week, the country moved a step closer to putting in place a uniform tax regime in the country, when the empowered group of state finance ministers gave its in-principle nod to a proposal to go for a dual GST—a Central tax and a single uniform state tax across the country; separate GST rates, to be finalized later, would also be fixed for manufactured products and services.

If the formal nod follows at a meeting scheduled later this month, then by the beginning of next year, India would have a blueprint to bid goodbye to the current system of myriad taxes and tax rates. We will be on the threshold of a genuine common market.

The GST will eliminate multiple duties such as octroi, Central sales tax and entry tax that hinder internal trade and are a source of corruption. Their elimination will also remove the cascading effects of such multiple tax rates and may even result in a lower price to the consumer at the point of sale.

The GST will also take away the discretionary component of taxation, where state governments and the Centre were allowed to exempt select commodities from the tax net and thereby create distortions in the overall fiscal structure of the country.

Companies, too, will benefit in a more direct manner, with better logistics and lower transaction costs. At present, companies are forced to engage in vertical integration. Locating part of their production process in another state and then moving it to the main plant would, under the present structure, inevitably lead to tagging of additional costs in the form of various state levies. Elimination of this hurdle also means that companies will be able to spread their manufacturing operations all over the country. Not only would it optimize logistics for companies and make them more competitive, it should also help backward regions in the country.

The Vijay Kelkar panel, which had first suggested the move in 2003, has computed that a GST would lead to additional gross tax revenue of 2% of gross domestic product and nearly half of this would be shared with states.

Whenever the GST does come through, it will be the culmination of efforts spread out over more than a decade. Though the initial steps in tax reform were taken in 1986, it was only in the early 1990s that it received a big leg-up under the leadership of the then finance minister, Manmohan Singh. Subsequent finance ministers did well to not only keep up the pace but also engage with their counterparts in the states. Without the latter, the “grand bargain" wherein states have to limit their rights to tax would never have materialized.

Now that the in-principle approval is in place, both the Centre and states will presumably embark on installing the requisite information technology base, without which the GST cannot be implemented. One suggestion is to use the tax information network developed by the National Securities Depository Ltd to map individual 31 million taxpayers. In many ways, implementing GST would be similar to making tax deducted at source on individual taxpayers. Further, once the 700,000 firms in the country are brought under such an IT umbrella, it would also help tax authorities ensure better compliance.

Clearly, then, the Centre and states should renew their efforts to clinch the remaining steps and ensure that India meets the 2010 timetable.

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