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Economy Jan 31, 2013

GST gets a lifeline.. but still hangs in balance

By Rajesh Pandathil

At long last, there is some positive move on the roll-out of goods and services tax, which has been held up for last several years.

GST is an indirect tax that will lead to the abolition of all other taxes such as octroi, central sales tax, state-level sales tax, excise duty, service tax, and value-added tax (VAT).

According to media reports, the Centre and the state governments have arrived at a consensus on the sales tax compensation to state.

The Centre has also agreed to a floor rate with a narrow band for the tax, climbing down from its earlier proposal of a uniform GST rate across the country.

It has also given states an option to exit the system, if they find it unviable later.

The roll-out is going to be a phased one, as in the case of value added tax.

Reuters

This bill, which gives power to states to impose service tax and Centre to levy tax beyond manufacturing, is being considered by a Parliament standing committee now. Reuters

The intention to introduce the GST was made in 2006-07 budget by then Finance Minister P Chidambaram. The reform is aimed at bringing the country under a unified tax regime. It is also expected to bring prices down for consumers, increase the government's revenues and boost economic growth.

Uncertainties galore

Though now there is clarity on some of the issues, one major uncertainty remains - the rollout deadline.

As of now, the only consensus on this is that the next government, which comes to power after the April 2014 general elections, will decide on this.

So there is a chance that the Congress will not get to claim the credit for bringing about a reform. So, political bickering, which was a key reason for the delay in the rollout as BJP-ruled states kept stalling any move towards resolution, is likely to derail the introduction again.

In a report in the Business Standard today, Bihar finance Minsiter Sushil Kumar Modi, who heads the empowered committee of state finance ministers, has said that the state governments want legal assurance from the Centre about the promised compensation.

As per the suggestions by a panel of central and state government officials, for a two percentage point cut in central sales tax to 2 percent, states are to be given 100 percent compensation for 2010-11, 75 percent for 2011-12 and 50 percent for 2012-13, the BS report said. The arrears for the compensation would be Rs 34,000 crore.

Will the government be ready for this? It is not yet clear.

Besides this, the Centre has to get Parliament approval for the Constitution Amendment Bill, that will help the GST rollout. This bill, which gives power to states to impose service tax and Centre to levy tax beyond manufacturing, is being considered by a Parliament standing committee now, the Business Standard report said.

Now comes the bigger hurdle of setting up the IT backbone for the GST Network. The government has been working on these projects for the last two years, according to this report.

Making a start

"A 'diluted' version of GST might not be the best outcome, but a start needs to be made," Kotak Securities Ltd said in a note yesterday.

"With the CST compensation issue out of the way, we believe this would pave the way for reintroduction of a revised GST Bill in the Parliament," it said.

It sees a phased implementation of the regime but notes that "all states need to be on board for the GST to have its full positive effect".

Moreover, allowing states the flexibility to raise revenue during natural calamities and in a disaster situation "is likely to violate unification of the tax regime". However, this would be necessary "as a concession at least for backward states", the brokerage has noted.

Among benefits of the GST rollout are a 100 bps boost to the country's GDP growth and 70 bps increase in the government's revenue.

"Additionally, there are likely to be lower consumer prices and positive effects on trade," it said.

According to an NCAER calculation, exports are estimated to gain 3.2-6.3 percent and imports fall by 2.4-4.7 percent with the implementation.

by Rajesh Pandathil

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