Given how nearly half the revenues state governments collect come from either petroleum, liquor or stamp/registration charges, it is not surprising they want them kept out of the proposed Goods and Service Tax (GST) framework. Add other charges like octroi and entry taxes, and the opposition of various states, both UPA as well as NDA ones, is more understandable. States have also been protesting a common threshold for both the centre and the states taxing both goods and services, arguing this will bring in millions of small traders into the taxman’s net.
While the opposition of the states is well known, and the political overtones can’t be ignored either, what is less clear is why the central government is doing such a poor job making its case. Given that a third of all revenues of states come from their share of central taxes, a specific reference to the 14th Finance Commission could have helped matters—a higher share of central taxes that need to be devolved certainly would help soothe frayed sentiments. More important, while it is understandable that states want to be able to tax petroleum products or liquor at a higher rate, an obvious solution was to tax them in two parts—at a basic rate that could be part of the GST with a provision to allow states to levy a sin tax on top of this, to get them back to the rate at which they wish to tax the products today.
Theoretically, the implementation of GST can always await the next government, more so since the current one does not have the wherewithal to pass a Constitution Amendment Bill that is vital for GST. But the important thing to keep in mind is the fillip GST will give to tax collections in the country by virtue of lowering rates dramatically. From an average tax rate of around 25% today across the centre and the states, the rate on the much larger base that a GST entails can ensure effective tax rates can come down to 18-20%, a goal worth aspiring for.