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Has Union Cabinet really put GST Caravan on 'fire'!

TIOL - COB( WEB) - 427
DECEMBER 18, 2014

By Shailendra Kumar, Editor

THE much-speculated GST Bill [The Constitution (122 nd Amendment) Bill, 2014] finally got the Union Cabinet nod yesterday evening, putting at rest the apprehensions of the India Inc as well as foreign investors who were keen to measure how staunch was the commitment of the Modi Government to India's most constitutionally radical indirect tax reforms. The Cabinet approval was the culmination of several rounds of meetings not only between the Union Finance Minister and the representatives of the Empowered Committee of States but also between the North Block and the South Block. On more than three occasions the Finance Minister is learnt to have taken the Prime Minister into confidence to offer fresh inducements to the States for agreeing to the proposed Bill. And out goes the message that the PM was very clear in his instruction - no matter what it may take, the 'ship of reform' must not be allowed to be 'rocked' as it would send wrong signals across the globe. Kudos to the PM, the FM and his GST team for succeeding in averting what appeared to be a weighty calamity on December 11 when the States did not budge even an inch from their stand taken on various aspects of the reforms on July 3, 2014.

Let's now pay a little heed to the School of GST Skeptics. As per them, what appears amusingly confounding is the sudden change in the stand of the Empowered Committee on GST and an almost-rapid fire thrashing of a fresh 'deal'. They disbelievingly argue that if there is a deal and the States have agreed to what the Centre has been hammering on for the past seven years, why is there no joint communique on what transpired in the FM's room. Both sides have been keeping mum since the evening of December 11 when the EC's Chairman, Mr Abdul Rahim Rather, had reiterated the unanimous decision of all the Members that they would not agree to the GST subsuming Entry Tax in lieu of Octroi; Purchase Tax and goods like Petroleum and liquor. Of course, he stated more bones of contention that day but by the time the wall clock tolled 9 PM, there went the 'unofficial feed' to the media that both the parties - the Centre and the States, who were thousands kilometers apart in the afternoon, managed to cover that distance at a jet pace in a few hours! And it was obliquely indicated by some officials, neither by the Union Finance Minister nor by the EC Chairman, that since virtually States have crippling dependence on petroleum, tobacco and liquor for their revenue, they would be kept out of the GST net for a few years and the States would continue to levy VAT on them till the time the proposed GST Council initiates the process of bringing them under the GST network.

It is being speculated that in lieu of such a give-away, the States have probably agreed to the proposal that GST would subsume the Entry Tax and other smaller taxes like Entertainment Tax, Purchase Tax and Tax on gambling and betting levied by some States. To further sweeten the package the Union Government is also learnt to have agreed to compensate the States for GST revenue loss for three years and then comes the tapering for the next two years. It is also believed the Union Finance Minister has agreed to jack up the compensation package for CST losses to all the States, including those who had hiked the VAT rates to recover their losses but could not do so fully.

But what is surprising for many experts is that if such a deal has been sealed why did the Centre avoid a Joint Press Conference of the Union Finance Minister and the EC's Chairman and a few heavyweight State Finance Ministers. Such a transparent approach would have sent much stronger signals across the globe, including the stock markets which would have been saved from the Rouble-led mayhem. Is it a strategic silence on part of both the parties? No Finance Minister who participated in the negotiations on December 11 th deal, has spoken on this issue after homing back to their state capitals!

One common interpretation that is being made is that on December 11th, no consensus was arrived at except on the point that the Centre may rush through the Constitution Amendment Bill, 2014 so that it does not face any embarrassment. And such a Bill as it is a new Bill for the 16th Lok Sabha, may be referred again to the Standing Committee on demand from the States for further amendments or improvements. If the Modi Government manages to save it from any delay in the Lok Sabha, it would get stuck in the Rajya Sabha where the Opposition Parties have the majority and the Bill may be referred to the Select Committee. Meanwhile, the Centre and the States will continue to hold talks and bridge the gaps issue-wise. If that happens, the Modi Government will have to wait till mid-2016 when it would ascend in number and acquire majority in the Rajya Sabha. If such a delay is caused, it would take another one year for the GST legislation to be passed and rules to be made and notified. In that scenario, to reap some political capital, the BJP may like the introduction only from 2018 - close to yet another General Elections in 2019 so that it could be politically encashed.

Let's leave such speculations to the school of skeptics for drawing more inferences and go straight to some of the turfs which continue to create differences between the negotiating parties. One such area is the weightage assigned to the Central Government in case of voting. As per the Bill, in case of voting, the Centre's vote will have weightage of ONE-THIRD of the total votes cast and every decision shall be taken by a majority of not less than three-fourths of the weighted votes of the Members present. In this background, many States have proposed that such a design of votes amounts to giving VETO POWER to the Centre which may block the proposals of the States. They have favoured that in the spirit of federalism, the majority required for approving proposals should be reduced to two-third of the votes.

Many States have expressed reservations about the IGST model. As against the one peddled by the Centre, many of the States have put their weight behind the modified bank model and the compensatory VAT model. West Bengal Government has favoured the Clearing House Mechanism for the IGST model. One positive development is that the Centre has agreed to put its share of IGST collections in the devolution kitty so that the States would continue to benefit from the entire collections.

On the issue of DUAL CONTROL, they have demanded that traders up to an annual turnover of Rs 1.5 Crore should be left to the jurisdiction of States only. Gujarat, Maharashtra and Haryana have been insisting on the concept of additional compensation for the exporting states as they have invested their resources to build strong manufacturing base and they would be losers if the GST, a destination-based tax system, is implemented. The solution they have suggested is that 2% of IGST collections may be earmarked for exporting States!

Some of the States have come up with their individualistic issues. For instance, Orissa has called for a new levy of 'Green Tax' under the ambit of GST which may be collected and paid to mineral rich States who would be subjected to additional bout of pollution because of exploitation of their minerals. Some of the North-Eastern States which levy taxes on betting and gambling have called for exclusion of such taxes from GST as their VAT collections are in the range of barely Rs 100 Cr to Rs 200 Crore.

No doubt, these are minor hitches which can be overcome by the proposed compensation package. But what may cause some wrinkles on the FM's forehead is the persistent demand for hiking the CST rate till the GST is rolled out. The States' view point is that since the Centre is not able to compensate them for the CST losses, the CST rate may be rolled back to 4%. But such a roll-back would send wrong signals and may even dilute the commitment to GST roll-out. In this background, the FM will have to take the extra burden of releasing more funds towards CST compensation so that they do not protest before boarding the GST bus.

Even as Mr Arun Jaitley prepares to table the Bill in the House, the Chief Economic Advisor is learnt to be busy holding talks named as 'GST Charcha'. A couple of days back he invited the representatives from the mainstream chambers of business and discussed at length on various aspects of the roll-out. On this occasion, two prominent faces which were seen after five years were Dr Vijay Kelkar and Mr Arvind Modi of CBDT who had headed the Task Force set up by Mr Kelkar when he was heading the last Finance Commission. Mr Arvind Modi apparently gave detailed presentation on his GST and IGST models which were rejected long back. What meaningful purpose it would serve now when the GST bus has travelled so much of distance is not yet known. But whether something comes out of such talks or not, an effort is on to rope in the industry chambers for some alternative thoughts on the proposed reforms. TIOL, on its part, wishes the Prime Minister and the Finance Minister good luck for their efforts to overcome all the irritants to introduce the biggest reform in the area of indirect taxation.