The benefits of a 3-tier GST

The new Goods and Services Tax (GST) is broadly as announced by Pranab Mukherjee in his Budget speech in July, and will comprise two parallel systems.

The central government's system will replace the existing central excise framework and service tax structure, while also encompassing some other taxes that are currently not offset.

The more difficult part of the transition is on the part of the states, which will have to extend the intra-state Value Added Tax (VAT) that was implemented in 2005 with an inter-state GST. This means that state-level taxes paid on inputs (goods and services) procured from State

A will be deductible for the procurer located in State B. This is an enormous administrative challenge but, even before that hurdle is reached, some basic principles for harmonising tax rates and procedures have to be accepted and given effect to.

This task is being addressed by the empowered state finance ministers that successfully brought in the VAT (though it took a long time!). The group is once again chaired by Asim Dasgupta, long-time finance minister of West Bengal, and has just reached an important milestone in agreeing to a three-tier rate structure, which all states would have to implement.

There will be a low rate for items of "mass consumption", a standard rate for all other items, and a premium rate for precious metals. The fact of having reached this agreement is significant in and of itself.

Critics will legitimately argue that multiple rates, particularly with states retaining some discretion over the classification of goods and services, will significantly erode the efficiency gains that the system can and should generate.

Further, the group has also conceded the demands of some states that some groups, like small and medium enterprises, be exempt. This will further dilute the effectiveness of the GST. However, from a pragmatic perspective, it would probably have been too much to expect that the collective process would arrive at a single rate, with no exemptions.

The compromises may reduce the gains but will not eliminate them. It is, therefore, worth going ahead with the group's proposals, with some expectation that the formulae will be streamlined along with the inevitable administrative bottlenecks. This is a situation that justifies not letting the best become the enemy of the good.

There are other issues which the group has to resolve, and time is not on its side. A constitutional amendment has to be made to enable states to tax services. This will require co-ordination and consensus-building amongst the multiple political parties at both central and state levels.

Then, as with any significant tax reform, there is the issue of compensation for lost revenues in the transition process. Both will test the aphorism: "Where there is a will, there is a way". Hopefully, a large enough number of stakeholders are already persuaded about the benefits of the transition.