This level of secrecy is not conducive for a tax reform such as the GST, which will touch upon the day-to-day economic activities of all sectors of India’s economy.

There are numerous unresolved issues related to the GST’s design, structure, rates and administration that will have a significant impact on the performance of the forthcoming GST.

In terms of the GST’s design, there is currently discussion within the GST council that there will be a separate additional tax on demerit goods and environmentally harmful goods. The objective behind imposing this tax is to generate revenue to compensate the states for any revenue loss during the first five years of the GST’s introduction. It is unclear whether the tax will be imposed with a sunset clause or will continue as an additional source of revenue for the central government. Imposing this separate tax without provision for input tax credit will result in tax cascading  and go against the fundamental advantage of introducing a GST — removing tax cascading.

As far as interstate commerce is concerned, the current proposal is that the central government will levy and collect integrated GST. The importing dealer will then be able to claim input tax credit for integrated GST paid on these goods against taxes payable on subsequent transactions. Interstate sales will attract integrated GST and the due input tax credits will be transferred to the importing state so that the state GST liability of the importing entity can be settled. But the input tax credit pass-through mechanism for interstate business-to-consumer transactions requires clarification. It is unclear whether the input tax credit of the state’s GST on business-to-consumer transactions will also be transferred to the importing state. If not, then revenue generated could be substantial given the growth in e-commerce.

With the imposition of GST, it is expected that there will be no legal provision to levy entry tax on those commodities that are kept outside of the GST system. State governments currently collect substantial revenue from entry tax and central sales tax on goods like petrol, crude oil, natural gas and alcoholic beverages. The GST may lead to revenue losses due to removal of entry tax from these items. If so, the central government will likely compensate states for this revenue loss.

The GST council has also discussed that GST compensation to states will be decided based on net revenue, excluding revenue accruing from non-GST items. This is a substantial improvement from earlier ideas of GST compensation to states being based on gross revenue collection. The council has discussed that GST compensation will be based on 14 per cent nominal growth of revenue across all the states with respect to the revenue collection of 2015–16.

There is also a proposal under consideration to utilise the proceeds of the Clean Environment Cess as GST compensation for states. The Clean Environment Cess is placed on both domestic and imported coal, lignite and peat. The objective of this tax was to finance and promote clean environment initiatives. But if the proceeds of the tax are used to provide GST compensation to states, this will deviate from the stated objective of the tax and also go against the basic principle of environmental taxation.

As for GST rates, present discussion indicates that there will be four different tax rates ranging from 5 per cent to 28 per cent. But this will make design of the GST complicated as well as increase the cost of compliance and tax administration. If accepted, the proposal will open the floodgates to classification disputes and business demands for lower rates on their goods or services.

For a common market to emerge in India, GST rates across states for specific commodities must be harmonised. Deviation from the common rates by any state may lead to a higher compliance burden for businesses with India-wide operations. Harmonisation of rules and regulations — as well as GST rates — is also desirable from a business point of view. Careful assignment of tax rates across commodities is expected from the GST council.

Administration of the GST is another important issue. Under the present system, central sales taxes on interstate sales are administered by the state tax administration. Under the proposed GST system, taxes on interstate sales will attract integrated GST and will be administered by the central tax administration. This is an issue between the central and state tax administrations that requires consensus.

The GST council has decided to set the threshold for GST registration at 2 million rupees (US$30,000), compared to the current 15 million rupee (US$224,000) threshold under central excise duty (CENVAT). Currently, discussion indicates that 90 per cent of the registered entities (including service providers) with an annual turnover of up to 15 million rupees will be assessed by the state tax administration and the rest by the central tax administration. Taxpayers with an annual turnover above 15 million rupees will be equally distributed between the state and central tax administration for assessment.

This proposed GST administration system is expected to reduce the compliance burden for small taxpayers and encourage a cooperative environment for tax administration. But there is no clarity on the criteria for selection of cases for assessment under state or central tax administration. And while there is also discussion that uniform criteria will be applied across all states for selection of assessment cases, some states have already developed extensive methods for selection of assessment cases that may be incorporated into the development of the general system.

Sacchidananda Mukherjee is an Associate Professor at the National Institute of Public Finance and Policy (NIPFP), New Delhi.