The Centre and the states have done well to agree on how much the Centre should offer as compensation for the reduction in the central sales tax introduced as part of transiting to a goods and services tax (GST). The liberal compensation of Rs 34,000 crore removes a formal hurdle in instituting GST, and is, therefore, welcome. However, the real hurdle in the path to a countrywide GST is politics. The BJP has been holding out on the needed changes to the Constitution.
The Centre has offered it a good excuse by not yet completing the information infrastructure and clearing mechanism for inter-state set-offs. Both sides should appreciate that the Indian economy needs all the help it can get and that a GST would serve as a major non-monetary boost to economic growth.
There should be bipartisan cooperation to create a borderless national market. GST will remove multiple taxes at the central and state levels that cascade (economists’ jargon for levying a tax on a price that includes an element of tax, so that tax cumulates on tax) and jack up retail prices. As manufacturers will get credit for the taxes they pay on inputs across the value chain, it would lower product prices and make Indian companies more competitive. GST will also create a unified database of tax potential, giving tax collectors information on corporates and income.
Many other issues must be resolved before the transition. Broadly, the Centre and states have agreed on a dual GST, comprising a central GST and state GST. States want multiple tax rates. That is undesirable but not incompatible with GST, as tax credits will be available even on inter-state transactions.
In the European Union, rates of value-added tax vary across member states. So, the Centre can accept the demand for state-level freedom to fix state-level GST rates. The BJP should cooperate to ensure speedy passage of the Bill to amend the Constitution to empower both the Centre and the states to tax both goods and services. Other details of working out tax numbers must be completed at the earliest. An early transition to GST would make eminent sense.