The finance minister has recently announced his intention to actively engage the states in the discussions surrounding GST and attempts to introduce the tax in 2013. This is a very encouraging announcement, following a long hiatus on the subject. There has been a lot of talk about the likely economic benefits of introducing this new-improved version of the value added tax. Given that this reform requires consensus among a large number of governments at the central and state level, adopting an approach that addresses the specific concerns of both the parties is necessary for the sustainable design of GST. While there will always be a large number of steps to be completed before such a tax can be implemented, it is critical to firm up a few policy decisions. The following is an attempt to set up a check-list of sorts on the policy decisions required.

The most important decision that needs to be discussed is the extent to which the GST regime would represent a uniform tax regime across the entire country. While the common man views the proposed GST as a regime where there will be a single tax and single administration across the country, the policymakers do not echo this notion. This is an important decision to arrive at and to announce, in order to build opinion among the ?stake holders??in this case, the tax payers?on what the nature of the proposed tax is.

It is useful to recognise that the states often voice the need to preserve/retain a sense of ?autonomy?. It is important to define and delineate a measure of this notion. Then this notion can be reflected in the design of the GST. It could help in determining the rates of tax, in determining definitions and tax credit rules or in determining forms and procedures for administration. Whichever be the agreed upon form of ?autonomy?, its identification would allow for a clear and well-structured harmonisation of all other factors. It is desirable that the proposed constitutional amendment reflects this identification of form of autonomy while defining the function of the GST council.

The second key decision relates to the form of administration of GST. While the public announcements on GST suggest that there would be a common registration, and common return filing and e-payment through a common GST portal, there is no information on whether the rest of the functions of the tax department would remain separate for the Centre and the respective states. Separate assessment, audit and/or appellate functions could potentially mean replication of work for the tax departments and a perception of ?harassment? for the tax payer. For the same transaction/return, the two concerned departments can potentially raise different claims requiring separate settlements. The attractiveness of the GST regime would be significantly reduced if the compliance cost considerations of the tax payers are not taken into account while designing the administrative structure of GST. Not just a decision on this matter, but also a public announcement of the decision taken should be considered important in order to ensure that the en route hurdles to introduction of GST are reduced.

In designing a suitable administrative mechanism for GST, it is useful to point out that, in terms of compliance costs, uniformity of procedures is essential. With a common tax base and uniformity in procedures, it is possible to conceive of a number of alternative ways to ensure that the tax payer faces a single integrated/coordinated tax department. This could be in the form of a comprehensively integrated single tax department administering taxes for both the Centre and states or two separate departments with an administrative carving out of the tax base for administrative convenience. This separation of activities can be in the form of pre-existing skill-sets: central administration can deal with manufacturing and services while state administrations can deal with wholesale and retail trade. Alternatively, some people have proposed segmentation on the basis of turnover, with smaller turnovers assigned to the state tax departments and larger ones assigned to the central tax departments. In each of these options, the two tax administrations need to coordinate closely and accept the results of the activities undertaken by the other. Further, how any proposed segmentation exercise would extend to the appellate functions needs to be spelt-out. It is important to recognise that these are concerns not only of the tax departments but of the tax payer as well.

Once these big ticket decisions are taken, there will be a number of smaller decisions demanding attention: for instance, a same threshold for all states may make the tax irrelevant in some states as very few tax payers would remain. So, must there be some flexibility on thresholds, at least for the smaller states?

As a part of the constitutional amendment, petroleum products have been proposed to be kept out of the purview of GST. It has been argued quite extensively in various circles that this policy is best achieved through the GST Act and rules rather than consitutional amendments.

Alongside these major decisions, it is useful to recognise that the revenue implication of GST could be quite different across states. While the compensation mechanism would ensure support in the short run, some alternative mechanisms need to be identified after the proposed compensation period is over. This could mean the identification of some other sources of revenue that can differentially augment the revenues of states that are losing out in the move to GST. Else, the states would become dependent on Finance Commissions to address these concerns as well.

The author is professor, NIPFP. kavita.rao@nipfp.org.in