GST Roll-out — Modi government’s final push
Roll-out of the much-awaited General Sales Tax, a possibility now
The regime of levy of sales tax on goods and services varied considerably leading to a lot of confusion, litigation, and frustration among the business community. The system of General Sales Tax was therefore conceived so that goods and services could move across state borders without hassles and hindrance.
However, the petty-mindedness and parochial mindset of leaders in a few states made passing of such a well-intentioned legislation a lengthy and tortuous affair. The bone of contention was the compensation the states would get from the center after GST is implemented. After GST comes in to force, all the money collected from business transactions would go to the central government’s coffer, leaving the States high and dry, who will lose their power to levy and collect taxes. To address this legitimate concern of the states, the centre offered to compensate them through direct cash transfers.
Despite long-drawn negotiation, some states could not reconcile themselves to the idea of GST and the subject remained mired in controversy. Some states, however, agreed readily, but with a few others not on board, the effectiveness of the GST reform was greatly diminished.
The BJP government under Modi appears to have given this matter a decisive push forward. The Cabinet Committee on Economic Affairs has taken a few steps so that the GST regime is implemented fully by April, 2016.
The first concern was about the quantum of compensation. Some States feared that their compensation from the central government could be less than what they are presently getting through direct collection of sales tax under their own authority.
Earlier, the Central government under UPA 2 had proposed to compensate the States at the rate of 100 per cent for first three years. Later, it was to be reduced to 75 per cent in the fourth year, and 50 per cent in the fifth year. Some states did not quite agree to such drawing down of central compensation. In June 2015, the States made a pitch for full compensation for all five years. The then central government did not accede to it stating that such a move could delay adoption of GST by a few more years.
Another stumbling block was the demand by a few industrialized states like Punjab, Tamil Nadu, Maharastra etc. for one additional point of tax on the supply of goods. These states contended that they had nourished the industries through heavy investment in infrastructure, and should be compensated through the benefit of this additional levy of one percent tax.
Some less industrialized states with manufacturing base opposed the idea of this additional one percent levy. Their argument was that the spirit of uniform tax regime for the whole country through adoption of GST would be defeated if a few states levy additional tax of any nature. Even Chief Economic Advisor Arvind Subramanian had objected to the idea of imposition of additional tax by a few states.
In a meeting held on July 29, the Cabinet cleared an amendment by which the States will be entitled for full compensation for five years. This relaxation will take the wind out of the sails of the states who had doggedly resisted GST so far.
Regarding the 1 per cent additional tax, the Cabinet decided to exempt stock transfers within group companies from the additional tax on inter-State supplies. Thus, a unit of Tata Motors can dispatch goods to its sister concern in Gujarat without paying the additional one percent levy. But the cabinet did not waive the one percent levy altogether. So, some resistance from a few States could linger to delay the GST roll out.
However, seen in totality, the government’s move to hasten GST implementation by April, 2016 is laudable. This reform is one of the boldest one that will have far-reaching ramifications for the economy.
You may also like...