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Delayed GST is better than flawed one - Does FM really mean it?

TIOL - COB( WEB) - 480
DECEMBER 24, 2015

By Shailendra Kumar, Editor

THE GST-salivating sentiment can now be seen hanging in the air, almost everywhere. Merely because of the fact that the Opposition parties have managed to put the passage of the GST Bill on the backburner in the Rajya Sabha the promise of multiple advantages arising out of such a system has not diminished for the industry and the foreign investors alike. Only two days back, while speaking to an Indian TV Channel, the Chairman of the Templeton EM Group, Mr Mark Mobius, said that his company would double its investments into India if the GST Bill is passed in the next few months. Such a sentiment among potential foreign investors was collected by a senior banker who was recently in Singapore to address a mini-conclave of foreign investors. A similar pulse can be seen even among the domestic investors who have, against all the global odds pitted against economic revival, begun to see GST as a major growth driver.

But, unfortunately, our politicians have become 'pulse-blind' and they tend to see their party-interests more important than the national interests. If we leave aside the failure of the NDA Government to win over the opposition, the onus to pass the Bill was no less on the MPs from the Opposition Parties in the Rajya Sabha. If we analyse the three demands of the Congress Party against the backdrop of how aggressively the States through the Empowered Committee had negotiated with the Centre one may not see merit in any of the three demands. When Mr Arun Jaitley recently said that the demand relating to one per cent additional duty was fairly arguable, what he meant was that the Centre alone cannot take a call on an issue which is to be decided together with the States. Although the Centre had accepted the States' demand to compensate for the revenue loss for five years even then the industrial States had insisted on one per cent additional duty on inter-state trade of goods. Only to bring them on board the Centre had succumbed to such a demand for two years. In this backdrop, how does any Opposition Party expect the Centre to unilaterally accept any demand which has dozens of other stake-holders.

Secondly, with respect to the 18% GST rate being insisted to be a part of the Bill, the Opposition Parties cannot be expected to be ignoramus about some of the basic variables which are yet to be decided. How can a single rate or multiple rates be decided when the exemption thresholds and the pruning of the exempted items (300 in Central Excise + dozens in Service tax + 99 in VAT) are yet to be negotiated. Against this ground reality, even the more than bold report of the Arvind Subramanian Panel suggesting 15-15.5% RNR and 18% GST rate is out and out flawed. No doubt, such a single rate must have gone a long way in pleasing the heart of the industry but it is going to be unrealistic when all the facts unfold at the stage of rate negotiation with the States in the coming months. As regards the observation of the former Finance Minister, Mr P Chidambaram that there is a precedent of a rate being put in the Constitution (he was referring to Rs 2500 professional tax), one should not look for merit in it as it was undoubtedly a mere political teaser. A legal brain of Chidambaram-size cannot be expected to compare a professional tax with the GST. If it is otherwise, Central Excise is just one component of the proposed GST and I wonder why did he not see merit in putting the entire tariff rates in the Act itself. The fact that no Finance Minister ever talked about doing so as it makes no sense, such a demand does not deserve any meaningful debate.

But what does call for a debate and it is a case of missed opportunity for the Opposition parties is the demand related to a comprehensive food subsidy policy for the poor after the GST is introduced. The fact that several food items like rice and edible oil are not taxed today but the supply of the same would be subjected to GST rate, it would adversely impact a large population of poor in the country. To mitigate such an impact, the States and the Centre should come out with a Discussion Paper suggesting how food subsidy is going to be transferred to them. Malaysia is a good example of such a case where the Federal Government has clearly put its intent in the form of a food subsidy policy. The fact that nobody is talking about such a policy, the Opposition Parties led by the Congress should have taken an initiative in this regard and it would have garnered nationwide support for them.

Let's now go to their third demand with respect to incorporating a provision relating to Dispute Settlement Body. Such a provision existed in the guillotined 115th Constitution Amendment Bill but the same was dropped after the Standing Committee made its recommendation. And as Mr Jaitley says it was Mr Chidambaram who had attached a hand-written note-sheet in the file, finding merit in the recommendation and dropping the idea of such a body. Now when Mr Chidambaram is in Opposition, where from he is borrowing merit in this demand for such a body. When the entire power is proposed to be vested in the GST Council it should be left to be decided by the Council itself. All the stakeholders are aware of the recent precedent of the VAT switchover and what sort of mess was created by many of the States in the absence of a regulating apparatus. The GST Council is going to be the same apparatus which is expected to suggest a modality to resolve disputes arising between the States or between the Centre and the State.

In this backdrop, Mr Jaitley is right when he commented on the non-passage of the GST Bill - a delayed GST is better than a flawed one. If Mr Jaitley really believes so, then he should not lose time in directing the GST Committees to act on popular feedbacks received against the four documents officially released recently on various business processes like return, registration and refund. One mega concern of the industry is the proposed invoice matching for allowing credit to the recipient of goods or services. If the tax paid by a recipient to a supplier is not deposited, the proposal to deny credit to the recipient is nothing less than inviting chaos with an open arm! When the profit margin in the economy is going down (it is normally 3-5% in case of trading), denying credit at the rate of 18% would not only break the credit chain but also ease out many players from their business. Such a system has not worked anywhere in the world. Invoice matching for internal analysis is fine but denying credit is certainly outrageous. Secondly, the proposal relating to State-wise registration for CGST is equally impractical as it would perhaps block the availment of credit accumulated in other States and more importantly, a service provider would be worse off than what it avails today as Centralised Registration. Similarly, the proposal to charge GST on all supplies made to EoU and SEZ and allow them refund of the same is another major area of concern for the industry. At present, such supplies are treated as zero-rated exports. Any change in the method which would eat into the cash flow of the industry is likely to be resisted.

The fact that Mr Jaitley is looking forward to a positive change in the constitution of the Rajya Sabha by April, and he is going to go for yet another big push, he should not lose time in putting the Draft GST laws in public domain. Considering the fact that the Draft is ready and the basic draft law papers are being leaked or being put on official websites by some States, further delay would not do any good to the larger cause of the GST roll-out. This would also help save time for Mr Jaitley as the industry and trade would have sufficient time to share their feedback before the GST Bill is hopefully passed during the Budget Session. Let's hope better floor management and an ambience of political cooperation finally lend the necessary momentum to the proposed GST which can now be implemented only from April 2017 at the earliest. If such a deadline is missed, the industry and trade may have to forget about GST till the next general elections.

Also See : TIOL TUBE Videos on GST

News Capsule 5 - Interactive session with Arun Jaitley on ‘GST in India'

Select Committee Report on GST

Episode 4 on GST - Select Committee Report

Tax manthan -Episode 1

Episode 3 on GST

Episode 2 on GST

Episode 1 on GST