India's empowered committee of state finance ministers, comprising chief ministers and other senior public officials from state as well as the federal governments, visited Canada from September 13 to September 20.
The delegation, led by Bihar deputy Chief Minister and Finance Minister Sushil Kumar Modi, discussed the Harmonised Sales Tax -- a single value added sales tax combining the federal Goods and Services Tax and the regional Provincial Sales Tax -- with the federal government and the governments of Ontario and British Columbia.
Bihar's Finance Minister and Deputy Chief Minister Sushil Kumar Modi tells Ajit Jain about tax lessons he learned in Canada
What's your mission in Canada?
We are here to learn about the harmonised sales tax functions. In Canada there is only one tax collection agency -- the Canada Revenue Agency. This single agency collects all taxes and then the federal government distributes the share of each state.
In India, the federal component is collected by the federal government and the state component by the state governments.
What is the Constitutional Amendment Bill which is still to be passed by the Indian Parliament trying to achieve?
The Indian federal government has no powers to go beyond the manufacturing stage in terms of imposing taxes. The manufacturing or excise tax is levied by the federal government.
If this Bill is passed, the federal government would be empowered to go beyond manufacturing and the states will also be empowered to impose taxes on services.
Would it not be more efficient to follow the Canadian system of establishing one agency to collect taxes?
The question is how feasible it will be in India. Businessmen have to file two returns -- one to the Central government and the other to the State. There are two separate audits of those returns. The HST in Canada is so convenient for business people -- they file one return, pay taxes to one agency, one audit, etc.
But some states in Canada have apprehensions and reservations (about HST) because of various reasons, and we are trying to understand that too. In India too, there are apprehensions among state governments, which are not ready for GST.
But we have learned from the Canadian experience. In British Columbia, the HST was withdrawn after protests; whereas in Ontario, the provincial government made preparations before the concept was introduced.
There was a long drive to convince the business community that HST was good for them. Now it has been stabilised in the province.
People don't like tax reforms or change. They believe they will have to make all kinds of changes. So, it is convenient for them to continue with older methods. The common man does not welcome any reform as well.
We have learned that a massive education drive will be needed before the GST is introduced so that it is acceptable to the ordinary citizen.
Another important aspect in Canada was that the government gave incentives to the business community on their taxes for implementing the HST. If you want to bring the states on board, you have to give some incentives to the business community in India as well.
What's the background of this new tax concept?
In 2005 the Value Added Tax was implemented in India. It is uniform in the country and the tax rates vary between 5 to 13.5 per cent. Following the introduction of VAT, most states are having very robust growth. There has been almost 23-24 per cent growth in the last five years.
When VAT was implemented, the empowered committee, which was constituted in 1999, played a very important role in the implementation of VAT, as it brought all the states on board.
The tax is collected by each state but the EC tries to bring uniformity. India has 28 states and seven union territories, same exemptions, etc. are not that easy.
In 2007, Finance Minister P Chidambaram announced that the GST would be introduced in India. The empowered committee was given the mandate to suggest how these reforms could be brought about. So, for the last five years, we have been trying to bring a consensus among the states and the Central government to implement the GST to replace VAT.
As of now, under the Constitution, the states are not empowered to impose taxes on services. And the Central government is not allowed to levy taxes on sales in the states.
We have visited two different countries to understand their taxation system. Last year, we went to the European Union and we will also be going to Japan.
So, your report will serve as a guide to all state finance ministers in determining the structure of the GST?
Yes. It is very important as we have learned so many new things. The GST is in over 150 countries. We have learned of their achievements and failures. Initially when the GST is introduced in India, State governments may incur losses in revenues. That should be compensated by the federal government in India.
Another important aspect we learned in Canada was the functioning of the inter-state trade. It is very important as in India we have this big issue of inter-state trade.
What happens if some states do not agree on GST?
It is the same as in Canada. Not all states have so far adopted the HST since you can't force provincial governments. In case of VAT in India, seven states didn't agree with it in the beginning, but subsequently accepted it over the next three years.
Let us suppose we have to implement the GST, and if certain state governments don't agree, we would have to analyse its larger implications. There would be one system in one state, and another system in another. The question before us would be how to manage the economy.
What about consensus on tax rates among states?
Our report will be ready within two months. We are thinking of two rates; unlike here in Canada where you have a single rate, one will be on essential commodities such as food articles, medicines, etc on which the GST would be at a lower rate. And the standard tax would be higher.
We are trying to create consensus in India. But it is difficult as there are different political parties ruling in different states. Also some are manufacturing states while others are consuming states.
We believe it will be a bit complicated initially in India. Chidambaram has announced that the constitutional amendment bill will be passed by March next year.
Image: Bihar's Deputy Chief Minister Sushil Kumar Modi
Photograph: Ajit Jain/Rediff