Why GST?

The announcement by union finance minister P.C. Chidambaram in this year's [2006–07] budget speech of his intent to introduce a national goods and services tax (GST) from 2010 has been enthusiastically welcomed by many, especially corporate businesses. This is understandable. For even after more than two decades of reforms, the task of reforming domestic trade taxes and moving towards a system of value added tax (VAT), which was considered necessary for the economy to function efficiently and smoothly, remains incomplete; a full-fledged VAT is still not in place. Neither CENVAT, the current name for excise duties levied by the union government, which is purportedly built on the VAT principle, nor the VATs that have come into operation in the majority of the states since April 2005 in replacement of their sales taxes bear all the attributes associated with a good VAT. Excises are a tax on manufacturing and suffer all the limitations of a manufacturer-level tax (definitional, correct value determination, and so on), despite heroic efforts to get around them. While the rates have been compressed into a general rate of 16 per cent, selective exemptions/concessions continue resulting in effect in multiplicity of rates. Services are also being taxed by the centre but selectively and not in an integrated fashion with goods. While cascading is sought to be alleviated by allowing credit for the tax paid on the purchase of services used as inputs against CENVAT payable on the manufactured product, the two taxes remain separate and administrated under different statutes. Crediting of service tax against CENVAT is riddled with rules that are far from simple. On the states’ side, considerable progress has been made towards evolving a harmonised system of VAT. Even so, deficiencies and irritants remain. Efforts for harmonisation with the prescription of a uniform standard floor rate notwithstanding, the structure of the state VATs remains diverse and flawed, with many states deviating from the agreed rate scheme unilaterally. Their rate structure pays no heed to the basic tenet of VAT, viz., taxation of inputs and final products at the same rate. Industrial inputs are taxed at a lower rate than what is applicable generally and a large number of commodities are taxed at a rate much lower than the general rate.