MARCH 10, 2015

By Dr Abhishek Chandra Gupta

WITH the acceptance of the Fourteenth Finance Commission's report by Central Government in principle, the states will be happy getting 42% share in the central tax revenue. The Central Government has sent positive signals to reduce the trust deficit between the Centre and States. It was expected that taking advantage of this, Centre could get passed the GST bill in the Parliament immediately with support from regional parties to garner 2/3 support in both the houses. But only thing predictable in politics is unpredictability. The entire opposition including Congress came together against the withdrawal of the Insurance Amendment Bill from Rajya Sabha and in Rajya Sabha even forced an amendment in the President's address. Thus there is an apprehension that the most important reform of the day, i.e. GST might fall prey to popular politics. If the GST Constitutional Amendment Bill is not passed in the current parliament session, the 01.04.2016 target of introducing GST will be tougher.

Such an important reform should not be left hostage to the political differences amongst parties. Already with each stage of negotiation between the Centre and states, the proposed GST structure is getting more and more flawed. It started with the exclusion of alcohol and the subsequent victims were the unified structure of the GST, unified administration, unified thresholds and now petroleum products taxation (even though for limited period) is slated to be the newer victim. With a GST with so many deviations from the ideal structure, the benefits may be overshadowed by the problems that will arise with it, i.e cascading of taxes, broken credit chains, dual administration. In the current political scenario, BJP is well placed to introduce unified GST (with Centre and state share of 50% each) in a phased manner over a period of two - three years in the following way.

1. Central Govt. has full powers to levy taxes in Union territories including Delhi (Article 239A and 239AA(3b) of Indian Constitution). Utilizing these powers,Centre should implement unified GST in all the union territories with the widest base subsuming Central Excise, Service tax, VAT, State Excise (alcohol), entry tax, immovable property tax, vehicle registration tax, and all other indirect taxes and allow seam less credit flow on input(including immovable property)/input services. To begin with, the rate of GST should be kept at 14%. Simultaneously the Central Excise and Service tax rate should be increased to same rate of GST ie. at 14% (Service Tax already proposed to be increased to 14% in the Union Budget 2015-16). This would on one hand allow Centre to garner extra revenue from rest of the country (extra 2% from current rate of 12%) to keep a buffer to support the GST implemented union territories in case of any shortfall in the revenues (which is highly unlikely). On the other hand this would make GST implemented Union territories advantageous for attracting business vis-à-vis non- GST areas as in non-GST areas the tax burden will be 26% [14% excise/service tax plus 12% VAT] with cascading on input side continuing compared to GST rate of 14% and seamless credit flow in GST area. The Centre should allow the credit flow between the central excise, service tax in non GST areas (14%) and GST areas (14%) in case of movement of Goods and services between the GST and non-GST areas, thus there will not be any cascading of taxes owing to GST or Central Taxes. In addition this will put GSTN under test and improving it before introducing all over India and ensure the Central indirect tax administration (CBEC) comes onto GSTN.

2. This in itself may not induce all the states to implement GST for the reason that the Union territories are few and isolated islands from each other.The BJP at Centre and our Prime Minister in particular should ensure that all the BJP ruled states and in states where BJP is part of ruling coalition (J&K, the latest entry) should implement the Unified GST (subsuming all indirect taxes as stated above) in BJP ruled states and persuade BJP allies and friends (including states in Orissa and Andhra Pradesh) to do the same. This can be done by a GST law enacted by parliament under Article 252 of the Constitution without any need to amend the Constitution . At this stage the GST rate should be further increased to 16%/18%/20% (with 50 % share of Centre and states) depending on the number of states it is implemented and from the experience in Union territories as to how much increase is required to achieve Revenue Neutral rate. This should be done along with a commensurate increase in the Central Excise and Service tax rate in the non-GST states to achieve the objectives as stated in first stage.

3. In this backdrop, a glimpse of the political map of India with current state governments of different political affiliations will indicate that there will be vast geographical spread of continuous GST area (common GST market) in India extending from Jammu and Kashmir in North to Andhra Pradesh in South and from Gujarat in West to Orissa in east. The North-East states and other smaller state scan be persuaded to join the Unified GST market by giving compensation to protect their revenue and additional incentives. This will induce the shifting of business from non-GST states to GST states (owing to higher tax incidences in non GST states), which in turn will force the non-GST states to join the national GST market. Additionally, the Centre would have to negotiate individually with the non-GST states. Just like in case of VAT, where big states like Tamil Nadu and Uttar Pradesh were forced to follow rest of the country to adopt VAT because of economic reasons, similar and even more profound inducing effect will arise for all the states to join GST.

Thus a flawless ideal GST can be implemented in a phased manner without any need for amendment in Constitution in the worst case if the GST Constitutional Amendment Bill is held hostage in the Parliament in the current Budget session of the parliament as the current BJP Government does not have sufficient numbers of 2/3 rd support in either house of the parliament or even in case of Joint sitting. The only thing required is an iron hand from the premier of this country who has promised development and prosperity to 1.25 billion plus population of this country.

(The author is Technical Officer TRU-CBEC & the views expressed are strictly personal.)