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Breakdown in GST Caravan - Guard against All Forces

TIOL - COB( WEB) - 478
DECEMBER 10, 2015

By Shailendra Kumar, Editor

THE story of 'baking' of the Goods & Services Tax (GST) in India is an interesting tale of 'vacillating fortune' of a historic reform. Prior to the Winter Session of the Parliament it had appeared from the on-going political skirmishes that the most important indirect tax reform was unlikely to make any headway. But then the fortune changed with a change in the aggressive posturing by the Government against the main Opposition Party in the Rajya Sabha. A couple of sensible statements coupled with one or two democracy-friendly invitations brought the Opposition to the negotiation table. The Congress Party aired its three demands before it decides to extend its support to the pending GST Bill. To placate the ruffled feathers of the Opposition, the Government agreed to set up a Panel of politicians from both the sides to thrash out some sort of workable formula.

It was so far going well notwithstanding the vociferous assault on the Government on some of the issues like the growing intolerance in the country. The key motormouths of the Government defended the deafening silence of the Prime Minister on this issue and then the PM himself spoke at length. It was so far a nice demonstration of a mature jamhuriat. Then came the 'inferno' in the form of the National Herald case. Even if there is a merit in this case, no political party in power would ever trade off a historic tax reform agenda for such a case which impacts only a handful of people. The ammunition seems to have caught fire with Sonia Gandhi calling it a 'political vendetta'. Even if there is no element of truth in such a charge but the fact remains that the disciplined floor management craftsmanship seems to be losing its efficacy. The Congress Party is likely to drag through the remaining period of the Session by raising issues reflecting utter banality. If that happens, it would amount to a major setback for a Government having substantive majority in the Lok Sabha but failing to cut much ice as far as reforms are concerned. Although the NDA Government may claim to have taken several mega policy decisions in the past 19 months but none can match the pedestal where GST rests today.

Even as the political drama unfolds with many new dimensions impacting the tax reform agenda, the Arvind Subramanian Panel, set up to suggest a Revenue Neutral Rate (RNR), submitted its Report to the Government. Much to the surprise of the Opposition, the State Governments and the taxpayers, this Panel has suggested 15% - 15.5% RNR and possible GST rates of 17% to 19%. And the surprise element in this case is a substantially lower rates than what was earlier suggested by the NIPFP to the Empowered Committee - 27% rate. How did it come down so low could certainly be a matter of intense speculation and some economists may find serious fault in several assumptions made by the Panel but the fact remains that the rates recommended by it would please the heart of both the Congress Party as well as the Union Finance Minister. The Congress Party has been asking for 18% GST rate and the same be put in stone for all time vide the Constitution Amendment.

Both the aspects of this demand are impractical and completely deprived of the benefits of a long-term fiscal vision even a short-history political party is required to develop in any political system. First, whether it should be 18% or less or more would largely depend on several politico-economic conditions in the economy. Since such parameters keep changing every year, fixing the rate in the Constitution itself would amount to the most unimpressive example of legislative bankruptcy. Secondly, the final call on the GST rate(s) is to be taken by none but the GST Council which should not be damaged by encroaching on its key jurisdictional turf even before it is formed.

So far as the other two demands are concerned, the NDA Government has more or less made up its mind to dispense with the one per cent additional tax on IGST for trade in goods. Ever since this new levy was proposed, the GST negotiators did not get any support from any quarter. Therefore, meeting this demand does not pose any difficult challenge for the Government. But the third demand is indeed a tall order and both the parties should sit together to thrash out a solution. Dispute Resolution mechanism for policy decisions or administrative issues cannot be handed over to the judiciary. All such issues would be administrative or policy-related which would fall within the ambit of the jurisdiction of the proposed GST Council. Involving judiciary for such issues is certainly not a bright idea. Secondly, diluting the weightage of voting rights and tilting it in favour of the States would go against the spirit of unitary bias which our Constitution fosters to keep India ONE NATION. For the sake of one market, One India concept must not be diluted at all.

This now brings us to the key findings of the Subramanian Panel Report. While working out the RNR it has taken into account a total revenue of Rs 6.5 lakh crore - both the Centre and the States. This figure clearly indicates that a major chunk of revenue has been kept outside the GST net for the sake of certainty in revenue collections. And the goods which contributes almost 50% of the revenue to both the Centre and the States is the petroleum. Another 10% revenue comes from tobacco products which are to be subjected to both - the GST rate and the Central Excise duty and even additional VAT. Since some of these items have been kept outside the GST which makes the reform incomplete, the Panel has called for bringing in alcoholic liquor for human consumption and the real estate within the scope of GST much sooner than later. Such decisions would not only strengthen the input tax credit flow in the economy but would also curb generation of black money and improve governance in the economy. Bringing electricity and petroleum within GST would enable the manufacturing sector to be more competitive and eliminate exemptions.

The Panel has rightly suggested that if the Governments are able to do away with exemptions like the direct taxes proposal, it would lower the RNR which means lower GST rates. But if the Centre and the States decide to retain several exemptions it would push the RNR upward. Therefore, without waiting for the final GST roll-out, both the Centre and the States should be come out with their own lists of exemptions which could be gradually eliminated starting with the Union Budget 2016. Such decisions would also make the task easier for the tax administration and the overall goal of a cleaner tax system.

Before I conclude I would like to extend my support to one of the least reported recommendations of the Subramanian Panel - Rs 40 lakh threshold. Ideally, it should be much higher to minimise the compliance costs of smaller businesses but the Panel deserves appreciation for looking beyond the need for revenue or work for tax administration and analysed the issues of taxpayers with the right perspective. It has also suggested that the Govt may allow even below threshold taxpayers to join the GST on voluntary basis.

Let's hope the NDA Government does everything possible to ensure that the present dialogue with the Opposition does not break down notwithstanding many provocations coming their way and even the Opposition shows a level of maturity in not denying what the economy badly deserves for long to rise to a new level of growth path with minimum inconvenience to the business.

Also See : TIOL TUBE Videos on GST

Select Committee Report on GST

Episode 3 on GST

Episode 2 on GST

Episode 1 on GST