The Hindu Business Line : A PROGRESSIVE TAX, BUT...

The case for a single national-level tax covering all goods and services is quite strong. The concept of a tax levied in proportion to the value added at every successive stage, which is what a value-added-tax seeks to do, is now widely accepted as a progressive measure in public finance. Indeed, it is in recognition of this that the Centre has long since adopted a value added tax system for excise and service levies and, more recently, a overwhelming majority of the States have adopted it to commodity taxation in their respective jurisdiction. If the constitutional arrangement for taxation as between the States and Centre is coming in the way of a harmonisation, then the legal framework, or so would go the argument, has to be changed.

But it is one thing to recognise the theoretical merits of a progressive tax system and quite another to be able to put in actual practice. It is here that the Government would be put to its sternest test. The most obvious challenge is in deciding whether the Centre or the States would administer the new unified tax system. The Centre would have a strong case for retaining this right for reasons both political and fiscal. But it is going to find the task of persuading the States to agree to the new arrangement perhaps more challenging than what it experienced in getting them to agree on the VAT. That the Centre would be able to affect their fiscal health is something the States would find politically unacceptable. The fact that the local politicians would find the arrangement eroding their privilege of setting the tax rates, providing exemptions on a selective basis, and so on, having the potential for some rent seeking behaviour, is not it going to appeal to them.

There are other challenges too. Implicit in the notion of a VAT is the adherence to a single rate for bulk of goods and services. But this would mean that the tax base is spread across the widest range of such taxable goods and services and that no single item accounts for the bulk of the revenues. But in the Indian context this is not the case. The Government relies excessively on petroleum products for mobilising tax revenues. Restructuring petroleum levies is fraught with political risks. Integrating the thousands of small and medium enterprises in both manufacturing and services sector across the country into the tax network or providing the fiscal space for municipal and village administration within the framework of an unified system of goods and services taxation would be the other challenge. It is possible that the Finance Minister merely used the plea of a harmonised national level Goods and Services Tax to rationalise a hike in the service tax rate for now from 10 per cent to 12 per cent, as proposed in the Budget. But there is no denying the arduous nature of the task ahead.

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