Opinion Not without states

Former head of the empowered committee of state finance ministers on the GST, Sushil Modi, has delivered a sobering reminder about the difficulty of seeing economic reform through, amid vaulting expectations from the new government, especially when several stakeholders, including state governments, are involved. According to Modi, a BJP-led government at the Centre would have to contend with the Centre-state tensions that have been touched off by the issue of tax reform. The new Union government — which may or may not have a more sympathetic disposition towards the concerns of state administrations — will have to take them into confidence and convince them of the desirability of the GST. It won’t be easy.

The main points of contention have to do with the inclusion of petroleum products, liquor and entry taxes in the GST framework. But there is a consensus among economists that there should be no exemptions in the regime because these lead to a cascading of taxes, which, among other things, is particularly harmful for export growth, and a loss of information because of the breakup of the input tax credit chain. But from the states’ point of view, these taxes are an easy source of funds — petroleum tax receipts add up to nearly 20 per cent of the states’ own tax revenues. In order to get over these stumbling blocks, the Centre needs to assure the states that it will make good any shortfall in revenue (based on projections of tax receipt growth), just as it did when the states switched over to VAT. And just as then, tax revenues are expected to grow tremendously, but there may be initial teething troubles, which is why the Centre’s guarantee is so important. Further, the Union government must allow states to levy sin taxes on top of the GST tax rate to protect their revenue.

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There are genuine fears about dual control over the tax base. With common threshold taxation, the Centre would start taxing firms that were out of its net earlier. The harmonisation of the Central and state-level tax machinery is of utmost importance to ensure ease of compliance and minimum harassment. This is where the IT framework for the GST, which Narendra Modi earlier complained was not ready, comes in. It’s up to him to get it ready now.