A uniform nationwide goods and services tax (GST), India’s most ambitious reform initiative that aims to stitch together a common market by dismantling fiscal barriers between states, is staring at fresh hurdles with no signs of an early end to the logjam in Parliament.
The government had targeted to rollout the new tax structure from April 1, 2016, an unlikely possibility given the current impasse in Parliament. The system can be rolled out only when Parliament passes the Constitution Amendment Bill, which can be passed only if at least two-thirds of the members vote in its favour. In addition, at least half of the state Assemblies will also have to pass the Bill.
The delay in the passage of the Constitution Amendment Bill implies that India’s indirect tax system will continue to remain mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain such as excise duty, octroi, central sales tax (CST), value-added tax (VAT) and octroi tax, among others.
Under GST, the Centre and states will tax goods and services at identical rates. For instance, if 20% is the agreed rate on a certain good, the Centre and states will collect 10% each, called the CGST and SGST rates. The delay will likely cause other consequences as well, since states would not be able to decide on the tax rates until the Bill is passed.
The government has commissioned Delhi-based think-tank National Institute of Public Finance and Policy to work out the GST rates that will not bring down either the states’ or Centre’s existing revenue levels. Separately, a panel headed by the chief economic adviser Arvind Subramanian is also looking into what could be the possible revenue neutral rates.
Revenue-neutral rates, as these are called in technical parlance, have been a bone of contention between states and the Centre, with the state governments pressing for higher rates as a hedge against lower tax earnings after migrating to GST. The Bill has not specified the rate, which will be decided by a GST Council headed by the central finance minister with state finance minister as members.
Pending the passage of the Bill, the Council cannot be formed and rates cannot be decided. In addition, it is also imperative to have a robust country-wide information technology (IT) network and infrastructure to make the implementation seamless across state boundaries.
The IT network is still work in progress, which was to be tested in the run-up to April 1, 2016, before its final roll out. This exercise cannot take place and glitches ironed ahead of implementation unless the Bill is passed and GST rates on specific goods and services are decided.
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