Column: Alcohol under GST-States’ objection defies logic

Sep 05 2014, 01:11 IST
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SummaryEven if alcohol is to be excluded at the inception of GST, the Constitution should allow the flexibility of bringing it within the ambit of GST at a later date

Even as the Union finance minister engages with the states to build consensus on the Constitution (115th Amendment) Bill for GST implementation, the states continue to resist GST which is irrational and unfortunate. This has become a serious hurdle in the government’s plan to revive the economy and provide a boost to manufacturing and employment growth.

One of the points of contention is the states’ opposition to the inclusion of petroleum and alcohol in the GST base. They argue that they raise a lot of revenue from these products, which would be undermined by their inclusion in the GST base.

This argument is baffling and defies logic. The strongest virtue of GST is that it leads to more revenues, not less. Virtually all countries that have adopted this tax have done so to strengthen the tax system to gain revenues. It has proven to be a cash cow for them. How can then GST on petroleum and alcohol cause revenue loss to the states?

Let us take the case of the alcohol sector. Inclusion of alcohol in the GST base can lead to revenue gains in three ways. First, assuming a state GST (SGST) of 10%, the application of GST to alcohol will provide about R10,000 crore additional revenue to the state governments, according to the sales reported by the industry to the tax authorities. This revenue will be over and above the revenue from excise duty and other taxes such as licence fee and bottling fee which the states currently levy on alcohol. The states will continue to have the powers to levy the existing taxes as the Constitutional framework for GST does not contemplate dilution of these powers in any way.

The second aspect is that GST will create an audit trail which will allow a more effective control and monitoring of the taxes paid on alcohol products. It is no secret that unreported sales in this industry are rampant and that cartels are a pervasive feature of the industry. These cartels thrive on opaqueness of the system, corruption and collusion. They peddle spurious products to the innocent, causing serious health hazards. The GST audit trail will provide greater exposure of the unreported activities.

The most significant source of leakage for the states is the inter-state movement of goods. Alcohol is no exception. The states have been trying to monitor such movement of goods through check-posts at entry points,

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