The report of the 13th Finance Commission’s GST task force is now online. While remaining faithful to the goal of integrating India into a single common market, the report is also respectful to the cause of cooperative federalism. As FE reported yesterday, the commission proposes a ‘flawless’ model, wherein a combined rate of 12% will comprise 5% for Central GST and 7% for state GST. It also incentivises states to join in by proposing a compensation fund to which the Centre will transfer a minimum of Rs 6,000 crore a year for the next five years if, and only if, the states introduce the recommended, ‘flawless’ GST model. By optimising efficiencies, encouraging compliance and widening the tax base, the report suggests that the GST will not only make for GDP gains but also create a host of beneficiaries ranging from the industry to the poor. For the latter, benefits will flow from 1) increase in income levels and 2) reduction in prices of goods consumed by them—overall prices of all manufacturing sectors would decline between 1.22% and 2.53%. Farmers would earn more for their produce and house construction would become less expensive. Again, all these gains have to be understood in terms of a broadening of the tax base—for example, by bringing real estate within the GST ambit. And the other key development is the restriction of exemptions, which were a little too abundant even in the GST discussion paper released by the empowered committee of state finance ministers on November 10. The 13th Finance Commission recognises that tax exemptions are economically inefficient, inequitable, lead to revenue loss, breed rent-seeking behaviour, increase compliance cost and enhance administrative burden. In this spirit, its report advises against area-based exemptions (including SEZs), and instead recommends that all goods & services exports be zero-rated.
In his budget speech this year, Pranab Mukherjee quoted Kautilya to say his government would not be collecting unripe fruits. By our reckoning, an ‘Indian common market’ should be more than ready for ripening by now. But much remains to be done before such integration comes about. For example, the 13th Finance Commission notes that without addressing fundamental concerns of IT infrastructure and information support systems, the adoption of GST cannot move beyond the conceptual stage. Then, there is the question of constitutional amendment—as of now, states cannot levy taxes on the supply of services and the Centre cannot tax the sale of goods. With the law ministry having conveyed that the required amendment would need 10-15 changes in various Articles, can the relevant Bill be tabled in the budget session in February? If it isn’t, the April 10 deadline for GST to come online will join a long list of others that remain unmet. That would be unfortunate indeed.