Despite sops, states not ready for GST

The proposed goods and service tax has again run into trouble, putting a question mark over its rollout next fiscal. A draft of the constitutional amendments circulated to the states has failed to cut ice with many of them, some going to the extent of saying the changes were unacceptable.

On July 21, union finance minister Pranab Mukherjee had proposed a three-rate GST structure in an attempt to break the logjam and also offered to make good any loss from shifting to the new tax regime. The finance ministry thought this would get states on board and circulated a draft of the constitutional changes needed to roll out GST.

The proposal included creation of a joint council to approve changes in tax rates and ensure that states do not raise rates unilaterally that defeat the basic objective of the tax — simplicity and creation of a national market.

The states are, however, unwilling to back a proposal that gives a carte blanche to the centre to block any tax proposal and effectively takes away their power to change rates.

Getting around this new roadblock will need a little more generosity from Mr Mukherjee who has already given in to the most of the demands of states — dual rate structure, keeping alcohol and petroleum products out of GST and full compensation — to get this important tax reform going.

Multiple-rate GST is considered difficult to administer in a complex country such as ours but it is not as if the model has not been tried before. The European Union that has multiple rates is a case in point.

The Centre could just prescribe a floor rate for the tax, allowing the states freedom to charge anything above that.

While a single-levy system is always a preferred, but in a country such as India given its political realities, it may be an uphill task to make 25 states to agree to it.

The flexibility to raise rates should get states on board, though it could increase the complexity of the system.

Experts are, however, confident that a robust and integrated IT system will be able to manage the issues of a multiple rate system. Pressure from industry will deter states from complicating the rate structure prescribed by the Centre and valid nationally, since different levies do pose challenge for cross-border supplies and claiming tax credits.

The Centre can also align the higher rate for goods with services to further simplify the tax even as it concedes ground to states. It has proposed a concessional 12% for essential goods, 20% for all other goods and 16% for services and eventually move to a single 16% rate structure in the third year.

The 8%+8% rate for goods would have made it attractive enough for the industry and trade also to put pressure on states to not delay the GST.