by Viral
Shah and Ajay Shah.
As with many other problems in Indian economic reform, getting to
the right destination on the GST requires winning on policy, politics
and administration. On the policy side, the basic design of the GST
needs to be done right. Pulling this off will require great political
skill - a coalition of beneficiaries from the GST will need to
champion it in the Indian federal setting. Finally, assuming that the
policy and the politics has been done well, it will require the right
plumbing. In this blog post, we review progress on this third
element.
Done right, the GST ought to replace all existing indirect taxes. This would remove barriers to inter-state commerce, and create an Indian common market. It
should treat all goods and all services identically. It should be a
single administrative system covering tax payments to both Centre and
States thus eliminating the compliance cost that is associated with
dealing with multiple tax authorities. It should be
globalisation-compatible: goods and services sold to non-residents
would be fully refunded the entire burden of indirect taxation that
has been incurred at all stages of production. India would then follow
the principle of not taxing non-residents. This would be fair for domestic producers who face foreign competition, and ensure competitiveness of domestic producers selling abroad.
These are powerful and important economic concepts. However, their
translation into reality is critically about execution. In the case of
the GST, as with the New Pension System, the problem of execution is
substantially (though not entirely) a question about building large
IT systems.
While much of the legal and policy framework around GST is still
being worked on by the Central Government in consultation with States,
some progress has been made on setting up the infrastructure for
processing registration, returns, and payments in a standardised
manner. A detailed note
on the IT infrastructure for GST has been put up by the Ministry
of Finance.
In terms of organisation structure, existing success stories
include the Tax Information Network (TIN) and the New Pension System,
both of which are being managed by NSDL. A more general concept of
`National Information Utilities' (NIU) was proposed by the TAGUP
Report. This report drew on the success of establishing market
infrastructure institutions such as NSE and NSDL, and recommended that
NIUs be such non-Government companies, with Central and State
Governments as joint shareholders, dispersed shareholding among other
institutions, avoiding shareholders that may have a conflict of
interest, and avoiding listing on exchanges. In spirit, NIUs must
have the efficiency of a private corporations, but be animated by a
public purpose.
In the Budget Speech of 2012-13, the Finance Minister announced
that a NIU for implementing the GST would be constructed. It would be
called GSTN and would be fully operational by August 2012. The first
steps towards constructing GSTN have now been taken, with a Cabinet
approval for GSTN. The official press release on this says:
The Cabinet has approved a proposal to set up a Special Purpose
Vehicle (SPV) namely Goods and Services Tax Network SPV (GSTN SPV) to
create enabling environment for smooth introduction of Goods and
Services Tax (GST). GSTN SPV will provide IT infrastructure and
services to various stakeholders including the Centre and the States.
The GSTN SPV would be incorporated as a Section 25 (not-for-profit),
non-Government, private limited company in which the Government will
retain strategic control. It would have an equity capital of Rs. 10
crore, with the Centre and States having equal stakes of 24.5%
each. Non Government institutions would hold 51% equity. No single
institution would hold more that 10% equity, with the possibility of
one private institution holding a maximum of 21% equity.
GTSN SPV would have a self-sustaining revenue model, based on levy of
user charges on tax payers and tax authorities availing its
services. While the SPV's services would be critical to actual rollout
of GST at a future date, it is also expected to render valuable
services to the Centre / State tax administrations prior to the GST
implementation.
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