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Working (Paper No.1/2009-DEA) on Goods and Services Tax

GST Reforms and Intergovernmental Considerations in India, By Satya Poddar Ehtisham Ahmad

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1. Introduction

2. The Current Taxes and Their Shortcomings

A. Taxation at Manufacturing Level

B. Exclusion of Services

C. Tax Cascading

D. Complexity

3. Objectives of Tax Reform

A. Basic Objectives

B. Fiscal Autonomy and Harmonization

C. Centre and State Taxation Powers

4. Options for the Centre and State GSTs

A. Concurrent Dual GST

B. National GST

C. State GSTs

D. Non-concurrent Dual VATs

5. Tax Base and Rates

A. Tax Rates

B. Food

C. Land and Real Property

D. Non-profit Sector and Public Bodies

E. Financial Services

6. Treatment of Inter-State and International Trade

A. Place of Taxation, International Transactions

B. Place of Taxation, Inter-State Transactions

C. Taxation of Imports by the States

D. Monitoring of Inter-State Supplies

7. Harmonization of Laws and Administration

 8. Conclusion …………………………………………………..

  1. Introduction

The replacement of the state sales taxes by the Value Added Tax in 2005 marked a significant step forward in the reform of domestic trade taxes in India. Implemented under the leadership of Dr. Asim Dasgupta, Chairman, Empowered Committee of State Finance Ministers, it addressed the distortions and complexities associated with the levy of tax at the first point of sale under the erstwhile system and resulted in a major simplification of the rate structure and broadening of the tax base. The state VAT design is based largely on the blueprint recommended in a 1994 report of the National Institute of Public Finance and Policy, prepared by a team led by late Dr. Amaresh Bagchi (hereinafter, the “Bagchi Report”). 1 In recommending a state VAT, the Bagchi Report clearly recognized that it would not be the perfect or first best solution to the problems of the domestic trade tax regime in a multi-government framework. However, the team felt that this was the only feasible option within the existing framework of the Constitution and would lay the foundation for an even more rational regime in the future. Buoyed by the success of the State VAT, the Centre and the States are now embarked on the design and implementation of the perfect solution alluded to in the Bagchi Report. As announced by the Empowered Committee of State Finance Ministers in November 2007, the solution is to take the form of a ‘Dual’ Goods and Services Tax (GST), to be levied concurrently by both levels of government. The essential details of the dual GST are still not known. Will it necessitate a change in the constitutional division of taxation powers between the Centre and the States? Will the taxes imposed by the Centre and the States be harmonized, and, if so, how? What will be treatment of food, housing, and inter-state services such as transportation and telecommunication? Which of the existing Centre and State taxes would be subsumed into the new tax? What will be the administrative infrastructure for the collection and enforcement of the tax? These are issues which ultimately define the political, social, and economic character of the tax and its impact on different sectors of the economy, and households in different social and economic strata. It is some of these aspects of the proposed GST that are the subject matter of this paper. We focus on the essential questions relating to the Dual GST design, and first discuss the need for, and the objectives of GST reform. We then describes alternatives to the Dual GST already endorsed by the Empowered Committee, not because they are superior in any way to the Dual GST, but to allow a fuller discussion of the trade-offs involved in the choice among them. Subsequent sections consider the question of tax base and rate, and proper treatment of various components of the tax base (e.g., food, housing, and financial services) in light of international best practices. The last section provides a discussion of the issues that arise in the taxation of cross-border transactions, both inter-state and international. An important question in this regard is the feasibility of, and the rules for, taxation of inter-state supplies of services.

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1 Bagchi, Amaresh et al (1994).

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