By Sofia Liska
May 22 – India has been trying to shift from consumption taxation to the goods and services tax (GST) for some time now. Unfortunately, there are a few obstacles that have continued to impede the progress of this transition. This article will discuss those obstacles.
It is important to know that the Constitution of India divides functions and powers three ways. Some functions and powers are only given to the Union Government, some only to the State Governments, and others to both the Union and the State Governments. In terms of taxes, those concerned with inter-state relations are levied by the Union, while those concerned with local issues are levied by the states.
The Center’s tax base will grow with the federal GST because it will gain the right to tax transactions beyond the stage of manufacture. Meanwhile, the states’ tax base will increase with the state GST because it will give them the right to tax services and the importation of goods into India. The goal is to transition to the federal and state GST simultaneously, however this has yet to occur for two reasons. The first reason is that the states are dissatisfied with the list of goods and services not to be taxed. The second issue is that the states believe they have not been fairly compensated during the phasing out of the central sales tax (CST).
Regarding the first obstacle, the Union Budget 2012-2013 includes a negative list that specifies the goods and services not to be taxed. Anything not mentioned on the negative list can be taxed. Through the Empowered Committee of the State Finance Ministers, the states suggested that the negative list include land and buildings, sale of goods, transport, entertainment and personal services, and certain other services. However, several of these are not on the current negative list proposed by the Center and therefore can be taxed, which would affect the states adversely.
The second hurtle is a blame game being played by the state and the Center over who ought to pay the price for the delayed implementation of the GST. The initial plan was to phase out the CST before April 1, 2010 – the date the GST was meant to take over. Because of the delayed implementation, the states are not receiving the CST or the GST and have therefore incurred losses. The Center’s opinion is that the states’ should not receive compensation beyond 2011-2012 because of this delay, for which both sides blame the other. VAT rates, which some states have increased from 4 percent to 5 percent, are another source of contention. The Center wants to consider this revenue when calculating compensation while the states argue that VAT rate increases are not related to the GST compensation issue.
Unfortunately, there appears to be no resolution in sight, but hopefully the states and the Center will soon focus again on the bigger picture.
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