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Sugar CESS - GST Council should not cave in to EAT the 'forbidden fruit'!

TIOL - COB( WEB) - 606
MAY 10, 2018

By Shailendra Kumar, Founder Editor

FOR the audiences outside India and experts of all hues in India, introduction of GST has indeed been one of the major recent achievements, not only for the Union of India but also all the States. And it was largely hailed as the inception of a new era of cooperative federalism. Though a healthy federalism has always remained one of the cherished constitutional goals in India but full credit goes to GST for bringing all the States - some of them joining willy-nilly, under one umbrella. Thanks to the smooth conduct of the GST Council meetings by the Union Finance Minister, all decisions have so far been taken by consensus or near-unanimity. But the same spirit was evidently missing at the last meeting of the GST Council.

Before I talk about what triggered thick wrinkles in the fiscal cooperative federalism framework which may further snowball into much more 'disruptive' force, let me briefly talk about a specific political tie-up going sour! AP Chief Minister Chandrababu Naidu had always been a reliable ally of the BJP. But their political relationship was tenuously dependent on what Mr Naidu has described as the grant of Special Status to his newly-carved out State. The Modi Government, perhaps for its own valid reasons, did not honour the spirit of the promissory estoppel and this led to a predictable fracture in their political tie-up. Even as a tug-of-war was gathering momentum on this issue, the Centre notified the setting up of the 15th Finance Commission. Soon, some of the Southern States noticed that the population based on 2011 Census was kept one of the criterions for the central grant to be distributed among the States. This was indeed a timely potential ammunition for the disgruntled Naidu Government which lost no time in organising a conclave of all such States which are largely at loggerheads with the Centre. And all of them expressed their concern about the unfairness of the Terms of Reference (ToR) of the Finance Commission. In his statement, the West Bengal Finance Minister articulated that "States are facing massive deficits". He further pointed out that the States need to resist the forced ceiling placed on States' ability to borrow.

Even as such undercurrents of acerbic feelings were gathering momentum, the 27th GST Council meeting proposed the levy of Sugar Cess to help distressed farmers. The Centre proposed such a levy as an elusive palliative for the financially-hurt cane growers. Though most State Finance Ministers would privately admit that such a distress needs to be addressed immediately but because of their growing ideological schism, many of them opposed it on various grounds. The Kerala Finance Minister pleaded that if the rubber growers in his State face similar predicament of the market forces, will the Council propose similar Cess? No doubt, there is a merit in his argument. Similarly, there is a merit in the Centre's viewpoint also. But, thankfully, the discussion did not stop at levying such a cess and a larger question was referred to a Group of Ministers - What measures can be taken to meet certain circumstances emerging from contingencies?

Undoubtedly, the GST laws provide wide enough room to levy new taxes or surcharge or cesses or whatever name it may be given. Insofar as the statutory powers go, there is no dearth of it. But, the much larger question is - Are we faced with a national contingency of such intensity that distortion of the GST system can be treated as a minor price to pay? Having powers to levy new taxes is one thing but exercising such powers at the drop of a hat is essentially an ethical question! How is morality involved in it? Just prior to the introduction of GST, it was unanimously agreed that all CESSES will be subsumed by the GST and the same was done. One reason for such a decision was not to dilute the CORE VIRTUE of the GST i.e. the Input Tax Credit. Since Cesses are generally levied for a specific purpose, it tends to deny credit for the same, largely. And it was widely appreciated by the industry and trade. Though compensation cess is one exception even within the fold of GST but it was accepted as inescapable, going by the Revenue Neutral theory.

Now, the GST is not even one year old toddler but the Centre wants to burden the 'young child' with more complex structure! Such a proposal appears to be originating more from the maxim - Old-habits-die-hard, rather than the actual need of additional revenue. The Centre intends to garner about Rs 7000 Crore to help cane growers. This is certainly not a huge revenue requirement for which the GST architecture should be infused with 'impurities' even before it gets fully accepted by the taxpayers. It has taken more than nine months to marginally spur the compliance percentage from 69% to 69.5%. And any more burden on it would further militate against the growing graph of its acceptance. Secondly, it is by no standards desirable at this stage to levy a New CESS for such a small sum. If the Union of India really wants to mop up such a small kitty of revenue, it has many other options to do so. One of the routes could be the hike in the "duty" on some of the NO-RESISTANCE DEMERIT goods such as tobacco and tobacco products. For doing so, it does not need to go back to the Parliament as it has the delegated legislative powers to do so. It can partly mobilise some funds by cutting down on some of its not-doing-well schemes or administrative expenditures. Opting for a new Cess on GST would be an easy route. I believe a huge chunk of fund is piled up under the head National Calamity Fund. By tweaking the definition of 'calamity', all such distress calls can be attended to by withdrawing some money from such funds also. In fact, a simple widening of the CSR canvas under the Companies Act can also partly do the job if it is linked to large sugar mills' obligations for CSR activities. If HELP is the objective, a good number of large groups of sugar mills which are warranted to spend certain percentage of their profit on CSR, there is nothing wrong if they are alone permitted to transfer certain benefits to distressed cane growers. It would always be more desirable to look for sector-specific solutions to help the audiences of a particular sector rather than distorting the entire fiscal system.

Our politicians whether at the Centre or the States, need to realise that the tax system should not be tampered with too often for smaller needs as such decisions go against the spirit of certainty and predictability of a system. Tax system should sparingly be used for direct welfarist activities. Such a virtue has now been accepted after seven decades of experience but the obduracy of the political habits often persuades the top leadership to overlook the 'cracks' in the system and achieve the short-term goals! This calls for a behavioural change among our Finance Ministers at the Centre as well as the States. Direct benefit transfer is a more secure and trusted route to help distressed populace and fiscal provisions should not be used to achieve the same. We have seen how tax exemptions have created distorted contours of industrial growth in many parts of the country. Some States have 'outgrown' their size and many States have become ' bimaru ' Having compiled several decades of such data, it is high time our fiscal strategists now realise that the tax system should be allowed to do its job - to collect revenue for the Exchequer by maintaining friendly skin!

If we leave aside the issue of sugar cess and even the proposal to incentivise digital payments which would be another unpleasant pill for the GST to get complicated with a tinge of impracticality, the larger question of mobilising additional resources in case of contingencies may be addressed carefully. The Group of Ministers (GoM) should not submit its report in an unholy haste. It should seek suggestions from experts and various quarters of the economy as the roadmap suggested by the Group would become a stubborn contour of policy for future decisions. Though there can be some very simple methods such as increasing the tax rates on demerit goods or the hiking the rate of compensation cess but what must be explored is the method which promises LEAST PAIN for the economy. It must be remembered that every extra penny that the Exchequer snatches away from the taxpayers, is largely and figuratively, at the cost of the economic growth. The simple equation is that lesser money in the hands of the industry and trade would mean lesser investment and lesser job creations which are an equally challenging front for the Indian economy today. And it has much more serious political implications for any ruling party than providing short-term palliatives to certain specific sectors. Let's hope the GST Council does not 'eat' the forbidden 'fruit' which may appear to be more attractive because it is low-hanging and takes a call on a measure which does not do long-term harm to the newly-born tax system!