NOVEMBER 20, 2017

By Dr G Gokul Kishore

GST Council has met 23 times since its constitution on 15.09.2016 by Presidential Order. While major decisions have been taken in each of the meetings, the last one in Guwahati will be remembered for providing a mini-Budget to the nation with sweeping rate changes and non-rate changes. The massive pruning of the list of goods attracting 28% rate is widely seen as eloquent evidence for responsiveness of the politico-economic leadership at both national and sub-national levels and keeping almost all the compliances except GSTR-3B in abeyance is perceived as proof of ‘ I told you so' for lack of preparedness in terms of IT infrastructure. Let us quickly look at the implications of GST being in WIP since its introduction and the likelihood of being in fiscal R&D lab at least till March 2018.

Is the industry happy?

Constant rejig and shifting of numerous items from one tax bracket (higher) to another (lower) evoke huge relief at the first instance. Majority in the industry have represented, pleaded and sought to bring pressure on both the Central and State Governments on rate cut based on the premise that the principle of equivalence has dented equity as the combined tax incidence of many goods in the post-GST regime was far greater than the pre-GST burden. Sensing that it is indeed true in certain cases, the GST Council presumably tasked the Fitment Committee to re-check the arithmetic. Every product and every sector has peculiar or native issues which could not be reflected in the tariff structure when it was framed in June / July. The Guwahati deliberations and decisions inform us that both incidence and sectoral issues or concerns have been addressed to a great extent with the median rate of 18% accommodating a very large number of goods. Cement and paint are two infra items still left with the company of sin goods at 28% and if the adverse revenue impact of tariff reductions is neutralized by increase in compliance and collections, these two items and a few more will also join the 18% club leaving 28% rate as truly sumptuary levy.

Is the industry happy? The answer is yes and no. Yes is obvious but no because the rate change has come after more than four months and the rate reduction will result in more credit accumulation which will take longer time to get liquidated. India is moving towards a common rate for goods and services except the exceptions and this should gladden the hearts of entrepreneurial community. The slowdown in economic activity should give way to accelerated growth once the demonetization blues and initial hiccups of GST wear off by next fiscal. The IT system of GSTN can be expected to stabilize by next March. The industry should then have no concerns except to forget the present bad patch and move on.

The great experiment in fiscal federalism

Month after month, immediately after the last day, there is an official release placing numbers on revenue collections in public domain. For the initial three months, the GST collections were following a pattern marked by consistency but the present rate reduction exercise will result in markedly lesser tax revenues. This may lead to sharpening of political contours to the great exercise or experiment in fiscal federalism of GST and the voices of demand for more compensation may get shriller. The data on compensation cess has also been consistent with no dramatic increase in these four months and it remains to be seen, after IGST settlements, how the Centre will compensate the States for loss of revenue at least in the next few months till the time demand picks up and economy gets revved up. It will be quite interesting to watch whether the bonhomie and consensus in GST Council meetings give way to acrimony and dissent. GST Council is a rare federal institution tasked with all important finance function and how it gets synchronized or co-exists with other institutions in general and legislative bodies in particular will charter the course of Centre-State relations to a great extent in the years and decades to come like the Planning Commission and Finance Commission did all these years.

Are the consumers benefitted?

This is the question the government tries to answer and attempts to ensure. The rate reduction exercises post-GST and the total tax burden in pre-GST vis-à-vis post GST regime are two goal posts that the government wishes to test the industry's responsiveness to its call for passing on the benefit to consumers. With anti-profiteering provisions in its arsenal, the strong arm of tax administration is sought to be unleashed when there is a suspicion of using GST as a means to fatten the books. Post Mafatlal judgment - 2002-TIOL-54-SC-CX-LB, the doctrine of unjust enrichment is being applied to achieve the same end and if the tax burden is proved as not passed on but refund is due, it is credited to Consumer Welfare Fund. In GST era, the industry needs to be prepared for pre-emptive strikes by the department by invoking anti-profiteering provisions coupled with the usual gargantuan task of discharging the onus to rule out unjust enrichment whenever refund claim is filed. After Guwahati rate cuts, the industry's response in terms of price reduction is yet to be visibly felt in the market. Considering the general increase in rate on services to 18% post-GST and the ever-raising input cost, product pricing will remain a challenge to businesses. Price is an economic function dependent on market forces and policing of pricing by the government may provide some comfort to consumers but expectation as to any substantial gain in savings for the consumers due to such tax cuts can only result from lack of understanding of complexities of pricing per se .

[The author is a Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are strictly personal.]