Finance Minister P. Chidambaram’s reiteration of his commitment to the Fiscal Responsibility and Budget Management (FRBM) rule that mandates the Centre to cut its deficit is heartening. Especially because it is followed by his statement the day before that in the next two to three years India would see the Goods and Services Tax (GST), a tax on goods and services based on the VAT principle. And more so because it follows Manmohan Singh’s recent statement that the next budget will see major tax reforms. The Indian economy is witnessing high growth despite a poor monsoon. Indian exports have done well. As the Kelkar Task Force report indicated, further growth of Indian manufacturing will depend on giving industry a level playing field with the rest of the world in the form of a world class tax regime.As the deadline for the removal of textile quotas on January 1, 2005 draws nearer, tax reform assumes even greater importance. India’s textile sector — which has immense potential to provide jobs, incomes and exports — has to compete with countries which have good tax systems in place. China had a GST in place as early as in 1994, and other South Asian nations like Sri Lanka, Bangladesh and Pakistan have already implemented the VAT. The tax sops to textiles that Chidambaram attempted in Budget 2004 are not sufficient to free the textile sector from the clutches of an archaic tax regime. While the preparedness of the Indian textile industry for the removal of quotas is much discussed, its competence vis-a-vis the Chinese is often commented on. What must be remembered is that the government has a role to play. It must chip in by not forcing Indian industry to export taxes.The finance minister must now turn promises and intentions into action. The debate on the tax system following the GST proposal has seen wide support from various sections. States are on their way to implementing the state VAT, an intermediate step towards the GST. To ensure the smooth transition to the GST, the finance minister must set up a task force to work out the road map to its implementation. While most states are willing to go along, and trust the Centre, it must be clear to them that their autonomy and freedom to set the tax rate for the state will be protected. It must be made clear to small traders that they will not be harassed by tax officials. A concrete road map is necessary if the GST is to come in place in two years’ time, if the FRBM targets are to be met and if the UPA government is to reap the fruits of tax reform during its current term.
