Despite the near-consensus that a nation-wide goods and services tax (GST) will add to GDP growth by creating a unified market for goods and services, this has remained a promise unfulfilled for a disconcertingly long time now. The Parliamentary Standing Committee on Finance has said states like Gujarat and Madhya Pradesh still have reservations about GST. Gujarat's main concern is that, having invested heavily in infrastructure and industry and being a net exporter of goods to other states, it could be a loser since GST benefits consuming states, as opposed to producing ones like Gujarat. Gujarat reckons the revenue-neutral rate for GST at 19.68% and contends this cannot be levied on all goods and services, so there will be a revenue loss of R9,000 crore a year. Madhya Pradesh's grouse is that the state's fiscal health would be endangered if it loses the freedom to change tax rates.
The fears are unfounded. With the standard VAT rate of 12.5% (and higher rates of up to 15% for high-revenue items like gas), the combined rate of Centre-state taxes on goods/services consumed in Gujarat is already much higher than the estimated 20%, which it now says would be difficult to implement. It is also wrong to presume that industrialised states consume less and so would lose revenue in the GST system. Industry consumes almost as much as the final consumer and end-level consumption also tends to go up with investments in industry. Most states which embraced the VAT system almost a decade ago (for the record, Gujarat and MP were also among the reluctant adopters of VAT) found their revenue growth have since accelerated. In the GST regime, prices of certain farm goods and services might rise, but those of manufactured items would likely fall and the overall inflationary impact of GST would be negative.
The House panel has pitched for striking a fine balance between the imperatives of a common market/unified tax structure and protecting the autonomous fiscal space of states. It has, however, called VAT a success and cautioned only about the flexibility needed for states to replicate that success with GST. Some of the recommendations of the Parliamentary Committee are well worth accepting—these include increasing the states’ say in the proposed GST council, a limited leverage for states to vary rates, a well-defined and structured system for compensation to states for any revenue loss and providing a continuous credit chain across