Powering GST calls for a fine balance

Care must be taken to avoid inadequately considered assignment of powers to States. This could lead to fiscal imbalances

“In the spirit of federalism, it has been agreed that States would be administering taxpayers below ₹1.5-cr turnover” — this announcement came from the West Bengal finance minister Amit Mitra, also chairperson of the empowered committee on GST, on June 14. The 122{+n}{+d} Constitutional Amendment Bill extends the power of taxation of goods as well as services to the Centre and States.

Under the scheme of taxation proposed in the Constitutional Amendment Bill, central (CGST) and state (SGST) are to be levied over a common taxpayer base. The issue of administrative arrangements under GST has hardly received any public attention and it needs to be put under the scanner. The basic idea behind introducing GST, which is to create a genuine, free-flowing, national common market, must not be lost sight of.

Tax assignment

A well-administered GST would significantly boost the tax to GDP ratio, enhancing the Government’s capacity to address its welfare objectives besides improving growth prospects. Any lopsided and inadequately considered assignment of tax administrative powers to the States has the potential to upset the revenue balance between the Centre and the State.

The assignment of taxpayers to States can lead to a situation of fiscal imbalance for the Centre and its expenditure responsibilities, including transfers, devolution and grants to the States under GST, as the States and Centre would be administering different tax bases. A possibility of horizontal fiscal imbalance would also emerge as there could be a real possibility of the States questioning inter-State transactions as intra-State transactions, impeding the smooth accrual of revenue by locking them in litigation. This would generate demands for additional equalisation grants and/or transfers, further stressing the finances of the Centre.

Fiscal imbalance can also lead to macroeconomic problems. The problems of fiscal imbalance would affect the fiscal destiny of the Centre and, by implication, the whole country. Ironically, the concerns of fiscal destiny have always been expressed in the context of taxing rights of the sub-national units in a federal polity world over, as taxing rights are mostly dominated by the central/federal government.

Change-makers

Attempts to assign integrated GST (IGST) powers to SGST authorities can lead to a constitutional impasse, particularly with respect to the provisions of part XIII of the Constitution. GST law cannot espouse destination-based taxation and have embedded arrangements for the possibility of origin-based taxation and thus have the potential to “directly and immediately restrict or impede the free flow or movement of trade” (Aitabari Tea Co v State of Assam AIR 1961 SC 232).

Three drivers of change — increasing mobility of economic resources, demographic change and technology — are particularly relevant when considering the future roles of each level of government in the tax system. Despite the powers assigned to the States to tax services under the Constitutional Amendment Bill, their capability to administer tax policy in the case of services is non-existent, unlike central tax authorities who deal with both goods as well as services. The paper, An analysis of the effectiveness of the State tax administration in India with particular reference to the value-added taxby Arindam Das Gupta and Fernanda Andrade (2012), highlights the high risk to the proposed GST reform from weak State tax administration.

India’s taxpayer population has undergone profound changes over the last few decades in its numbers, sectoral composition, and ownership forms. One of the most profound structural changes involves the growing importance of the tertiary (services) sectors. The Indian tax administration will operate in an increasingly complex external environment.

Challenges include the implementation of an ambitious tax reform agenda and the need to promote the business climate by reducing the compliance costs of the tax system. The increasingly complex environment facing the tax system will put pressure on the tax administration’s internal administrative capacity. Potential vulnerabilities include the tax administration’s organisational structure, staff skills, and information systems.

Basic task

A fundamental task of any tax administration is to collect revenues with lowest possible costs. A centralised tax agency may be able to reduce the cost of administration and compliance for the overall revenue system, including central and subnational taxes. The balance between cost efficiency and accountability may be seen differently by the States; policymakers at this level of government are likely to emphasise control of taxes, which has led to this demand for exclusive administrative rights over taxpayers below the ₹1.5-crore turnover mark. This question begs the adoption of a more national viewpoint.

A poorly performing tax affects people no matter which government is responsible for it. Recognising the political economy reality of India it has been well argued in the paper, GST reforms and intergovernmental considerations in India (2009), by Ehtisham Ahmad and Satya Poddar that a concurrent dual GST model has a lot to commend itself. It strikes a good balance between the respective fiscal autonomies of the Centre and States, and the need for harmonisation. It empowers both levels of government to apply the tax to a comprehensive base of goods and services at all points in the supply chain. It also eliminates tax cascading, which occurs because of truncated or partial application of taxes by the Centre and States.

This approach appears to be the best way to roll out the GST which will lead to actualisation of its perceived benefits.