Dr. Sanjiv Agarwal, FCA, FCS
In State GST, the States alone can levy GST and the Centre withdraws from the field of GST or VAT completely. It can be a desirable option given the mismatch in resources and responsibilities of the States. In this case, the State GST will work as the redistributing mechanism. The loss to the Centre from vacating this tax field could be offset by a suitable compensating reduction in fiscal transfers to the States. This would significantly enhance the revenue capacity of the States and reduce their dependence on the Centre. The USA is the most notable example of such arrangements, where the general sales taxes are relegated to the States. However, there would be significant hurdles in adopting this option in India, and it may not be suitable here.
Salient Features of SGST
- Levied by the States through a statute on all transactions of goods and services made for a consideration.
- State GST would be paid to the accounts of the respective State.
- Exceptions would be exempted goods and services, goods kept out of GST and transactions below prescribed threshold limits.
- Basic features of law such as chargeability, taxable event, measure, valuation, classification would be uniform across these Statutes / States as far as practicable.
- Reduction of cascading effect of taxes, as there will not be tax at two levels.
- It enhances the revenue capacity of the States and reduces their dependence on the Centre.
- It would seriously impair the Centre’s revenues. The reduction in fiscal transfers to the States would offset this loss, but still the Centre would want to have access to this revenue source for future needs.
- Major amendments to the Constitution of India will be required.
- The option may not be revenue neutral for individual States.
- The incremental revenues from the transfer of the Centre’s tax collection would benefit the higher-income States, while a reduction in fiscal transfers would impact disproportionately the lower-income States.
- Businesses will have to comply with tax laws of each State – which will definitely lack uniformity and harmony. At the same time, decision making will be impacted and may affect business stability.
- It would be impractical to bring inter-State services within the ambit of the State GST without a significant coordinating support from the Centre.
- There may be unhealthy competition among the States using local tax structure as a tool to attract industry within the States. This could lead to retaliatory measures by other States.