Why it is impossible to continue with GST law in its present form – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/view-why-it-is-impossible-to-continue-with-gst-law-in-its-present-form/articleshow/91728653.cms

Synopsis

​​It was presumed that the introduction of a nationwide fiscal system would give the Centre exclusive power over indirect taxation. The court has decided that the amendment of the Constitution that enabled GST’s introduction did not take away powers of the states to levy taxes. That makes it almost impossible to continue with the law in its present form.

Manmohan Sethi

Manmohan Sethi

Manmohan Sethi is former member, Central Board of Excise and Customs

The Supreme Court judgment on the goods and services tax (GST) should help to better understand the problems that GoI would face in its implementation. Five years is a short time to assess a tax system in a country as vast as India. Legal validity is an important part of such assessment.

It was presumed that the introduction of a nationwide fiscal system would give the Centre exclusive power over indirect taxation. The court has decided that the amendment of the Constitution that enabled GST’s introduction did not take away powers of the states to levy taxes. That makes it almost impossible to continue with the law in its present form.

The problem does not lie in the tax itself, which has been adopted by over 160 countries. It avoids the cascading effect of classical sales tax, and is self-enforcing in terms of limited liability at each stage of transaction till payment by the final consumer. But it has always created problems with countries that are a federation of semi-independent states. Canada had to face a similar legal challenge that resulted in its central government permitting provinces to go back to the original tax system. Brazil has permitted different tax rates in different parts of the country.

Though visualised by the Congress, GST was adopted as government policy by the Atal Bihari Vajpayee government in 2000, followed by the constitution of an empowered committee of state finance ministers headed by West Bengal finance minister Asim Dasgupta. But the BJP opposed the constitutional amendment Bill in March 2011.

Arun Jaitley, then leader of the Opposition in the Rajya Sabha, pushed for the adoption of a national fiscal system that would strengthen India’s federal political system. He knew it was not going to be easy. As Gujarat chief minister, Narendra Modi had objected to the tax in 2013, claiming it would result in a loss of revenue to the extent of ₹14,000 crore. But Jaitley used his persuasive powers to get the state governments to agree. It was decided that the shortfall of revenue for states would be calculated as 14% growth in GST collections by states over the base year of 2015-16 for a five-year period that would end in June 2022. If the tax was not a success, they could always go back to exercising their taxation powers.

Tax revenues in 2016-17 under the earlier tax regime had gone up by 20%. During 2001-17, central excise collections went up from ₹24,514 crore to ₹3,17,000 crore. Service tax went up from ₹2,613 crore to ₹2,31,000 crore. Even the states did well. State excise went up from ₹15,929 crore to ₹1,25,902 crore. States sales tax, from ₹72,874 crore to ₹6,70,875 crore. Except for the last two months, GST revenues have either fallen or shown a marginal rise. Administrative problems have been because of dual control.

When central excise was introduced, personnel from the states were transferred to form a uniform organisation with central control. But this has not been done in GST’s implementation. States continue to administer the tax with their personnel.

While a unified national fiscal system strengthens the federal structure, it should not lead to the loss of executive power of the states and its concentration with the central government. The only solution seems to be for the states to levy value-added tax (VAT) at retail level, and for the Centre to impose the tax at wholesale level, as was done by France in 1954.

Current procedures can continue to be used, except no forms would need to be submitted to the Centre beyond wholesale. The retailer would continue to receive the forms and invoices, but their control would rest with the state tax authorities. It would not be difficult to levy different rates for the same product as long as the input credit remains the same based on rates charged by the Centre from the wholesaler.

This would need time and effort. States should agree to the new system because it restores their power of levy to collect taxes. They may also agree not to press for the continuation of the 14% central assistance.

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