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Any modern economy, which is not richly endowed with natural resources, requires two broad-based taxes. The first is the individual and corporate income tax, and the other consumption tax on goods and services, variously called value added tax (VAT) or the goods and services tax (GST).

Taxing both goods and services under one tax is more revenue productive, and more equitable as the share of expenditure on services increases with household income than taxing goods alone, and selected services separately. It is also more efficient as broad-based tax, unlike excises, provides much less room for distortions in household and business decisions.

The proposed implementation of the GST from April 2010 is therefore in principle consistent with the above requirement. Indeed, the proposed introduction of the GST is widely regarded as perhaps the single most important tax reform undertaken since Independence.

The proposed implementation date is only five months away. Unfortunately, for such a far reaching reform with significant implications for India’s public finances, Centre-State relations, competitiveness of different sectors of the economy and viability of businesses of different sizes, particularly small and medium enterprises, and on macroeconomic variables such as impact on cost of living and on core inflation trends, the planning for its implementation is grossly deficient.

There are several indications of such unpreparedness for implantation.

First, the final design and other details of the GST are still not available. The government proposes to introduce the GST Bill in the Winter 2009 Session of the Parliament. Until the Bill passes, there is considerable uncertainty about the design details and how some of the key issues will be addressed, hampering preparations for implementation. This also hampers the analysis of the economic and other impacts of the specific form of GST, which finally emerges from the Bill, and then from the implementing regulations.

Second, there is widespread expectation that the harmonised GST, with single rate at Centre and the State level, is not politically feasible. Thus, the GST will be dual-staged, at the Centre and at the State level.

But the Empowered Committee of State Finance Ministers has not released to the public the report of its Working Group. This has also unnecessarily hindered informed debate about the implications of the GST. Thus, for example, if goods and services each are taxed at multiple rates, that could have serious implications for administering of the GST, and for the audit trail.

Third, the 13th Finance Commission, which is due to submit its report soon, has been asked by the finance ministry to study the Working Group’s report from the perspective of Centre-State fiscal relations. The Commission’s recommendation on this issue, as well as its full report, when released, will need to be debated extensively, and its implications for GST administration would need to be incorporated at the Centre and in all the states. This process should not be hurried. There simply is not sufficient time to undertake this process and implement the GST by April 2010.

Fourth, several states, including Gujarat, have voiced their reservations about introducing the GST by April 2010. These reservations have considerable merit, and need to be treated with greater seriousness. If some of the economically important states do not implement the GST simultaneously with others, it would disrupt the logic of the tax and will reduce the benefits of the GST to the country.

Fifth, the Pre-GST Survey, involving tax and finance executives of leading corporations with presence in wide range of industries, undertaken by Deloitte, and released in September 2009, finds that that while there is strong support for the GST, there is also widespread view that the implementation date of April 2010 is not conducive for incorporating requisite design features, and for preparing for implementation. Indeed, given the uncertainties about the final design features and implementing regulations, even the large businesses are unable to plan for a switchover to GST.

At the time of ongoing global economic crisis and intensifying competition for markets in both India and globally, it would be advisable to not subject Indian businesses to undue uncertainty in business environment. The compliance costs of the proposed GST, including transition costs from the current tax regime, should also be given due weight in the GST design and administration. In this context, the threshold level of GST becomes quite crucial. The compliance costs of the GST will vary inversely with turnover. As the GST uses input tax credit mechanism, exempting a business does not result is full loss of the tax revenue as tax paid on inputs cannot be claimed as refund.

Sixth, random discussions with sales tax officials from the several states suggest that there has been no systematic training provided to them for the GST and for the transition. Indeed, sales tax administrations of some of the States have not even fully smoothened out the existing VAT regime. The GST is indeed far more complex than the VAT. Moreover, for a rational GST, multiplicity of local levies which are currently in existence will need to be rationalised; and this task is still not complete. The area-based tax incentives will also need to be rationalised. The IT infrastructure for administering the GST; the tax identification number procedures, and audit procedures will also require considerable time once the GST Bill is passed and becomes Law.

The casual approach to the GST design and implementation is symptomatic of serious deficiencies in India’s governance mind-set. GST design and implementation should be approached as a project to be successfully implemented, with clear lines of accountability and lines of communication. Instead, such an important far-reaching tax reform is being treated as a part of Centre-State political game, with resulting potentially serious adverse consequences for India’s economic competitiveness, for credibility of tax administration, and for the credibility of the political class in general.

There is, therefore, a strong case for postponing the implementation of the GST. Some analysts have suggested that April 2011 would be a more suitable date. The key, however, is not to set any arbitrary timeframe, but to set a clear and credible roadmap for GST implementation. All the stakeholders, particularly the taxpayers, both individuals and businesses, deserve nothing less. They, in turn, must hold current governing parties at the Centre and in the States electorally responsible for failure to implement rationally designed and structured GST in a smooth manner.

(The writer is a professor at the Lee Kuan Yew School of Public Policy, National University of Singapore)