Why should states get a slice of central GST?

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The Opposition must support the passage of the Constitution Amendment Bill on the goods and services tax (GST) that gives the Centre and the states concurrent powers to tax value added. The BJP, on its part, should remove the flaws in the Bill and build a consensus with states on a clean GST. With a dual GST, central and state, the states will collect tax on services, which account for a lion’s share of GDP, on par with the Centre. At present, the states cannot tax the value addition in the production of goods, but with GST, they will get to do that. In addition, states would also get a share from the divisible pool of taxes, net of collection charges. Besides, the Centre has also promised to fully compensate states for five years for any revenue loss during the transition. The net result would be a revenue bonanza for the states. So, once GST kicks in, what is the rationale for the Centre’s collection of taxes on the value added in goods and services to be included in the divisible pool?

 

Unlike the states, the Centre will also have to bear an extra fiscal burden on account of compensation, in case of shortfall of state-level revenue. So, one option is to take CGST out of the divisible pool, leaving the proceeds of personal and corporate income tax, and customs duties. This will ensure that the Centre’s revenues are protected, at least to some extent. The counter-argument is that the bonanza for states is illusory. State taxes and levies will be subsumed under SGST. With a revenue-neutral rate (RNR), one that will leave revenues no worse off, states will end up with the same amount of revenue even when they collect tax on services. However, the argument is weak.

The RNR is a misnomer. There is no call to lower the rate merely to prevent revenue growing. GST generates audit trails that taxmen can follow to huge swathes of tax-evaded income. GST will produce huge revenue gains even with moderate rates. The parliamentary committee, that vetted the Constitution Amendment Bill on GST, should look into changing the approach to the sharing of taxes from the divisible pool.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
Source: http://blogs.economictimes.indiatimes.com/et-editorials/why-should-states-get-a-slice-of-central-gst/

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