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Why Centre must now work towards a flawless GST

By BS Bureau
June 23, 2016 10:43 IST

GST

This is a significant moment in the Narendra Modi government's drive to reform the economy and it should use this opportunity to strive towards ushering in a robust GST regime.

In what seems to be a significant political breakthrough, the Union government has made headway in its negotiations with states in rolling out the goods and services tax from April next year.

At its meeting in Kolkata on Tuesday, the Empowered Committee of Finance Ministers on GST narrowed down the political differences on the key provisions of the new tax regime that after implementation should help India become a unified market without the barriers of different state taxes and entry restrictions, improve the ease of doing business, reduce transaction costs and introduce efficiencies resulting in gains for the country’s gross domestic product.

Almost all states, except perhaps Tamil Nadu, have endorsed the idea of the new tax regime.

The opposition from the Congress is no longer a potent threat for the proposed launch of GST, as the Bharatiya Janata Party has improved its strength in the Rajya Sabha after the recently held elections and the government has received support for the new tax regime from regional parties such as the Samajwadi Party, the Bahujan Samaj Party and the Trinamool Congress.

The Constitution Amendment Bill, already cleared by the Lok Sabha, may now get passed by the Rajya Sabha in the forthcoming monsoon session.

Anticipating this, the finance ministry has released a draft law for implementing GST at the central and state levels, which too will have to be passed by state Assemblies and Parliament.

This is a significant moment in the Narendra Modi government's drive to reform the economy and it should use this opportunity to strive towards ushering in a robust GST regime.

It has already made the right moves in some areas.

In a bid to widen the tax base, it has proposed to lower the threshold for the new tax at Rs 10 lakh (Rs 1 million) annual turnover for all entities, down from the earlier level of Rs 1.5 crore (Rs 15 million).

There are already murmurs of protest over the expanded coverage of GST and it would make sense for the government to stick to the indicated threshold.

A lower threshold will also help the government to achieve another equally important goal of the GST: reduce the basic or the revenue neutral rate to as low a level as possible.

Wider the coverage, the greater are the chances of the basic GST rate declining to the more acceptable level of 15 per cent, as recommended by a finance ministry committee.

The proposed rate of 18 per cent should be reviewed and a lower rate will be feasible if the coverage is wider with a lower threshold of Rs 10 lakh annual turnover for entities and fewer exempted goods.

Demands for excluding goods from the purview of GST should be discouraged and rejected as far as possible.

Equally important will be to reject all demands for the levy of one per cent tax on inter-state transactions of goods and services.

Just as the Congress demand of keeping a cap of an 18 per cent tax rate in the Constitution Amendment law is unreasonable, the plea of some manufacturing states that they should be permitted to levy an additional one per cent tax on goods and services is completely unreasonable.

The additional levy will kill the basic spirit of GST and even make imports in many cases cheaper, undermining Mr Modi’s favourite Make In India programme.

On the question of the GST dispute resolution council, the finance ministry must recognise the legitimate concerns of the states and consider giving them adequate voting strength and representation on this forum.

Fiscal federalism should not be sacrificed at the altar of GST.

All in all, it would be important for the government to make sure that the country gets a good GST law that is as flawless as possible.

The image is used for representational purpose only. Photograph: Reuters

BS Bureau in New Delhi
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