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GST gets caught in another cycle of birth pangs

TIOL - COB( WEB) - 446
APRIL 30, 2015

By Shailendra Kumar, Editor

IF we go by the latest political events inside and also outside the Parliament, India's biggest indirect taxes reform post-1947 in the shape of Goods & Services Tax (GST) appears to be going through a new cycle of birth pangs. If we go to Bible Prophecy, birth pangs refer to certain convulsive geopolitical, geophysical, astrophysical and worldwide socio-economic events ... Even the evolution of GST, if we look back in hindsight, may appear to be experiencing similar geopolitical, fussy crony-federal and cacophonous constitutional pangs of birth. When the history is going to be written about its evolution, the Indian GST would be known for availing the services of multiple 'mothers' (Finance Ministers) who laboured hard for its possibly smooth birth. But every time the 'mother' thinks that 'she' is about to deliver, a new cycle of spasm of pangs intervenes and delays the birth!

This is what seemed to be happening in the Lok Sabha last Friday and early this week. The Indian Finance Minister, Mr Arun Jaitley, has indeed been working hard for the smooth passage of the GST Bill (122nd Constitution Amendment Bill) tabled in the last session of the Parliament in December, 2014 but he was taken aback by the sudden vociferous stand coupled with aggressive and brisk walk-out from the House by the main Opposition Party. Mr Jaitley was keen to have a debate rather very little debate as he believed that the Bill was an outcome of a political consensus arrived at with the Empowered Committee (EC) of State Finance Ministers. That is true but the main Opposition Party which had also gone through many cycles of birth pangs for almost eight-long-years surprisingly decided to have some fun at the cost of the NDA Government's woes. And it not only opposed on the flimsy ground of making a reference of the Bill to the Standing Committee but also won over some regional parties to join hands with them. It was not expected and the inevitable has once again been deferred for a period no astrologer would like to put his reputation at stake! Although the stated intention is that the House would take it up after the Finance Bill is passed but given the prevailing eco-system of animosity-filled polity the GST Bill is likely to gather several layers of dust before it is once again debated with a semblance of seriousness and sincerity.

What the Opposition Parties are doing is a little surprise. The biggest surprise is the U-turn which may be inferred from the content of the meeting the Union Finance Minister had chaired at Vigyan Bhawan a day before he sought a debate on the Bill in the Lok Sabha. As per reliable sources, some of the States once again made a serious attempt to upset the delicate political consensus by demanding longer period for non-Cenvatable one per cent additional tax on inter-state supply of goods from industrialised States. Worse, a couple of States even went to the embarrassing extent of showing their reluctance to lose their fiscal autonomy. Although the majority agreed with the Union of India and that is what prompted Mr Jaitley to initiate a debate in the Lok Sabha but he was caught unaware as some of the States were probably hobnobbing with their leaderships to embarrass the key mascots of the NDA Government who were heard making tall statements outside India on the proposed reforms.

In a nutshell, these details evidently reflect the true character of our national polity which is mischievous, shortsighted and completely bereft of a concern for the economy. How? Let's look at the journey so far. Miles away from an ideal GST India has been pursuing a new Doctrine of Dual GST rather a triplet if we include the IGST with SGST and CGST. Going by the substance of the reform the new System is not going to be majorly different from what we have - Central Taxes, State taxes and Central Sales Tax. Making a beginning with three coordinates clearly foretells the impending complexities and messy system we may be heading for. If our political class has any concern for the people who have voted for them and if they really believe that GST is going to be a win-win for all stake-holders why to go for 'multiple kitties'! The fact that some consensus has been achieved is nothing but deception and chicanery for the common taxpayers as most of the States are yet to be driven by the welfare spirit of the economy and the economic well being of their own people. They continue to mislead their supporters in the States and love to play harmful politics at the Central level.

Yet another area where most political parties are heard speaking against is the issue of black money. They never demur to bemoan the ills of black money but when it came to allow the Stamp Duty to be subsumed by the GST, none supported it. The fact that high stamp duty is the mother of black money generation in the economy and it has no economic rationale to be so high but as long as it is a milch cow for them, they would not like to have any reform. Worldwide stamp duty is nominal and is paid on transfer of title for immovable property so that the correct names of owners are reflected in the government records but our States have made a habit of collecting revenue from such transfer without looking at its ill-effects. And such a habit continues to guide them rather than the need for modernisation and reforms. Our States have failed to provide affordable housing, one of the promises enshrined in our Constitution but they shamelessly want to collect higher fees if one manages to buy a shelter for oneself. And this leads to underreporting of the actual costs of the purchase which results in generation of black money.

Let me now take the TIOL Netizens to a small town of Rohtak in Haryana. The Central Excise Commissionerate had, in association with the ICAI and also local industries associations, organised a workshop on GST. Kudos to the organisers for such a foresight and also keenness to participate in the historic evolution of GST but no amount of technical details reeled out by the domain experts to extol the virtue of the new system convinced them as they were looking for answers to some of their basic questions. One of them was - even after eight years neither the Union of India nor the States have provided any window or formal forum for the industries to share their mind with the 'tiny mothers' of the proposed reform. Being a key stake-holder they wanted to be consulted at every stage. Their desire to participate was further heightened when the Speakers pointed out that the GST is not going to be merely a new tax system but a game changer and a business-transforming reform. It would drastically change the way one conducts one's business today - it would impact their cash flow, accounting system, supply chain management, IT software etc. The fact that the new system is going to change the fundamentals of doing business today it is indeed wrong on part of the Centre as well as the States not to take them on board. It is necessary that the industries should be involved right from the beginning in the making of this new system rather than the governments simply deciding everything and asking them to comply with the same. It is impractical and also unfair.

In fact another stake-holder which is actually going to bear the brunt of a hybrid system should also be involved at this stage of multilateral talks. And they are the common taxpayers. Given the characteristic of indirect taxes which make no distinction between a rich or a poor consumer, it is important that some of the key consumers' associations should be taken into confidence so that there is widespread support for the new reform initiative. Merely stating that the GST would eventually bring down the prices of goods and services would do no good if the experts and the States continue to talk about as high as 27% GST rate. Such a rate clearly indicates that the GST era would be worse than the present VAT and Central Excise regimes. What about the Services? From the present 14% to 27% would be a spine-breaking jump which would impact the lower and middle income groups more. Since services sector accounts for more than 60% of the GDP, such a massive hike in the tax rate on services would inevitably be inflationary for several years before the theoretical seamless credit chain evolves and mitigates the impact of the high tax rate.

It is high time our political masters and also policy makers start thinking of the ultimate bearers of the GST burden and work hard to win over their trust and confidence before a new system is designed and put in place. Not taking them into confidence would lead to widespread non-compliance, tax evasion and tax frauds which would once again mean that the country would be going back to the old regime of preventive form of tax gathering. If voluntary compliance is a vital element of the new architecture, all stake-holders must be taken on board right from the initial stage of consultations and deliberations. Had it been done, the Union Finance Minister would have been better off in terms of taxpayers not letting their State Finance Ministers changing their colours on one or other pretext. Even now it is not too late and a hand should be extended to welcome them.