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GST roll-out: State fiscal jingoists succeed in proving April 1st as 'Fool's Day'!

TIOL - COB(WEB) - 161
NOVEMBER 12, 2009

By Shailendra Kumar, Editor

TIOL Netizens may recall the repeatedly uttered statements of the Chairman of the Empowered Committee of State Finance Ministers, Mr Asim Dasgupta, in virtually all forms of the media, in the past 45 days, that the Centre and the States would be coming out with a comprehensive 'White Paper' on the proposed GST. It was first slated for the last week of October, and then postponed to November 10. The postponement itself indicated that everything was not going well in the various Joint Working Groups set up to thrash out the contentious structural issues. The inability of the Empowered Committee (EC) and the Centre to successfully iron out the differences over the key features of the new indirect tax system came to be unmistakably noticed when the news leaked out from the EC that the Paper which was slated to be released last Tuesday was not a 'White Paper' but merely the 'First' of the 'Discussion Paper'. Then came another blow when the Union Finance Minister, Mr Pranab Mukherjee's statement made it clear that it was only the EC's Paper, and the Centre would studiously peruse the details of the various components of the proposed tax system. Let's see what the Finance Minister has said in the last para of his Speech:

¶On our part, I assure you that the recommendations and suggestions made in the Discussion Paper would receive our in-depth and meticulous attention so that we are able to jointly finalize the structure and design of GST at the earliest.”

The last sentence of the FM's speech clearly tells us the tale that the actual GST joint journey has evidently not yet commenced! The entire gamut of publicity, news reporting by the media and commentary by experts in various newspapers, were only to create a smokescreen of trust among the common man that India was indeed heading to a robust unified, common market where the century-old system of levying tax on tax by both the Centre and the State would soon be buried. But the concerted efforts and homework done in the past two years have apparently achieved nothing beyond a big ZERO. And it became much clearer immediately after entering the Hall No 4 at Vigyan Bhawan where a high-intensity deliberation was going on between the EC and the Centre. The mike was handed over to Mr Dasgupta. Although some scribes tried a few tricks to extract a few words from Mr Pranab Mukherjee, who was sitting next to Mr Dasgupta, on some of the contentious issues but their tricks proved to be simply pedestrian before the seasoned Congress leader. The Finance Minister had a straight and sternly-contoured countenance on his face which TIOL clearly noticed, and the reason was certainly not too knotty to untie. TIOL could make out that the preceding deliberations where many State Finance Ministers had aired their reservations were probably not in very good taste.

A little probe further revealed that the Empowered Committee had failed to take its diverse flock together. There were States like Madhya Pradesh, Chhatisgarh and Kerala who were not agreeable to the idea of trading off their autonomy for greater revenue and a unified market. In fact, the State of Madhya Pradesh preferred to adopt the approach of a fiscal jingoist, and scornfully rejected the idea of GST. Its Finance Minister went on to say, ''... some GST fundamentalists even want to subsume all State taxes in a 'Flawless GST'...''

Similarly, the State of Kerala preferred to remain outside the GST system. In a nutshell, all the States expressed reservations about the efficacy of the new system but the majority also indicated that they would not mind joining the national bandwagon if adequate compensation is guaranteed by the Union Government (Ultimately honey, it is money, sweeter than honey!). A major chunk also expressed their choice for retaining their autonomy to fiddle with the tax rates even under the GST system (there is a need to have a Constitutional body to keep an eye on States so that they do not alter the SGST rates like the VAT). All such child-like talks after holding dozens of rounds of talks, visibly upset the Finance Minister as he could clearly see concerted efforts to prove the deadline of April 1 as truly the 'Fool's Day'!

What further substantiated the 'April Fool Theory' were the subsequent utterances of Mr Dasgupta who told the scribes in the 'Press Meet' that the deadline for finalising the text of Constitutional Amendment is November 15 which happens to be a Sunday (Finalising Constitutional amendment even before agreeing to a common exemption threshold may sound premature!). Then Mr Dasgupta went on to share 'more info' with the scribes - the deadline for finalising the draft legislations for CGST, SGST and IGST and rules is November 30, and the deadline for putting in place the IT Infrastructure is January 15. Going by the unrealistic deadlines one may figure out how serious are the States when even the basic components of the GST like common exemption threshold, the Revenue Neutral Rate, the dual rates, the common exemption lists etc have not been finalised!

Let's take a quick look at some of the major announcements made through the Discussion Paper. The EC has unilaterally decided the exemption threshold of Rs 10 lakh whereas it wants the Centre to stick to Rs 1.5 Crore for goods, and an unknown figure (not indicated) for the services. In other words, the EC wants the Centre to continue with the prevailing distinction between what constitutes goods and what can be treated as taxable service (the very idea is inimical to the concept of GST). If such a distinction is maintained, the first fall-out may be that the benefit of exemption which is at present reserved for manufacturers, would automatically get extended to dealers in various states. Dealers are not even VAT exempt in the present state tax regime. This would also create a situation where some transactions would be liable to SGST but would not attract CGST - a major distortion in the taxbase, indeed! Secondly, the threshold limit is key to deciding the Revenue Neutral Rate (RNR). Higher exemption limit would automatically make the RNR much higher. And higher RNR would mean higher GST rates.

Let's now go to what the EC has proposed for the alcoholic beverages. EC wants them to be outside the purview of GST. If they remain outside the GST, how does the EC propose to countervail the cascading effect of tax paid on inputs like industrial raw material and packaging materials. States should not forget that the industrial variety of alcohol is an input for many industries like pharma, and keeping it outside the GST purview would break the input credit chain.

Similarly, States want to continue with the present system of levying VAT on petroleum, gas and ATF. Since ATF is a common input for the aviation sector, and gas has also become a major input for many mega units in the economy, they should be covered under the GST to ensure that the chain of Input Tax Credit (ITC) is not broken. If States want revenue from them, they can levy additional tax on them like they have done in the case of tobacco.

Interestingly, the States want to maintain their exemption list of 99 items and also insist on the Centre to continue with its own list of more than 330 exempted items. This would indeed create a ludicrous situations for the new system. Ideally, they should align their exemption lists as a large number of items on the exempted lists would naturally compel the RNR to be higher. If the RNR is higher, the GST rates would be much higher.

There are indeed many more such points which the Discussion Paper has shied away from answering that clearly indicate that both the parties have already entered into an intense battle of 'who blinks first' for postponing the deadline of April 1, 2010! Such a hawkish attitude by States to take undue advantage of the Union Finance Minister's keenness to facilitate the reforms may not be viable as the Centre has also to protect its territory. Mr Mukherjee has so far shown extraordinary fiscal generosity by agreeing to the States' illegitimate demand for Rs 14800 Crore VAT compensation where they have failed to hike the VAT rate from 4% to 5%, and also bring sugar and tobacco under the VAT regime. No doubt, States are to be blamed for the notable failure to finalise the major components of the GST but Mr Dasgupta must be given due credit for carrying together a motley crowd of State FMs upto this point. If he gets a little more support from Mr Mukherjee, one may expect more concrete consensus in the days to come. May God bless the State FMs with good sense to thaw the ice and take the reforms process to a logical end.

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