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August 18, 2012

"Goods and Service Tax The Seesaw Puzzle"


Ravi & Smita

On the budget day, the entire country was waiting for Finance Minister Pranab Mukherjee to set out the roadmap for the introduction of the Goods and Service Tax ('GST'). But the Union Budget 2011 became more a dampener with respect to the GST.

The Finance Minister announced that National Securities Depository Limited has been appointed as technology partner to establish and operate the IT backbone for the GST and also proposed to introduce a Constitutional Amendment Bill in the current session of Parliament. However, this is not enough to give confidence to industry.

Right from the year 2007, when the GST was conceived, till 2011, the football of this crucial tax regime is being played between the Center and the States. It has become a subject of sheer politics rather than implementation of tax reforms.

India is a huge country having a federal structure of governance with large number of the States and Union Territories. Further. India also has a written Constitution which delves in detail on the various aspects of the relationship between the Center and the States. Consequently, the States have the power to recover tax on the goods sold within the State or originating from the State and in the course of inter-State sales under the Central Sales Tax Act.

On account of multiplicity of taxes and separate Value Added Tax ('VAT') legislations of each State, discussions are centered around the issue of reducing cost of transaction and creating unified market throughout the length and breadth of the country.

Hence, inspite of having implemented VAT less than a decade ago, only an in principle decision has been taken to implement the GST.

The GST is a very dynamic and modern tax administration under which whole country becomes a common market and the goods and services can have a free flow across the States and Union Territories. While a dual structure of GST - SGST to be levied by the States and CGST to be levied by the Center - is proposed to be levied on a common base. The Country needs this vibrant tax structure in view of widening of global market and targeted high economic growth.

Further, a consensus needs to emerge for adopting a harmonized system of nomenclature to have common description of the goods and services liable to a common rate of tax across States and Union Territories. Thus, industry will be certain of applicable rate of tax as well as classification thereof under the respective State legislation. This kind of tax administration is bound to reduce the cost of transaction and litigation.

Having agreed to the benefits and threshing out of large number of contentious issues, the only hurdle in the implementation of the GST is the lack of political will among various political parties. Now, the question which we need to ask is whether this kind of regressive politics will deprive the whole country of a modern and dynamic tax reform? The obvious answer is no.

While it is regrettable that the Finance Minister has not announced any firm date for implementation of the GST, yet a hope is still alive that reason thereof can be to avoid further spoiling the Center-State relations. However, a consensus on implementation of the GST is yet to emerge.

The Empowered Committee of the State Finance Ministers should again lead the initiative as it has done at the time of implementation of VAT. We wish wiser counsel prevails and all major political parties rise above politics to think of the benefit and growth of the Indian economy, which the GST will bring.

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