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GST Rate Revision - Kicking Can Down the Road may save GoM from Hoopla!

TIOL - COB( WEB) - 790
NOVEMBER 18, 2021

By Shailendra Kumar, Founder Editor

SUCCESS has many fathers, while failure is an orphan! This time-tested proverb aptly applies to the Goods & Services Tax (GST) - a baby groomed and also 'doomed' by dozens of 'fathers'! It has come to be seen as a revenue laggard for its sloth-like momentum in tax collections! Right from its inception, it always had a less-than-stellar record! Theatre of politics backed by no methodical effort to do proper math created an unsavoury spectacle of populist fiscal demagoguery! If thermometers could have measured ironies, the roiling mercury would have been seen to be rising on the GST tarmac!

GST was brought in to garner more revenue than what the States and the Centre were, put together, collecting by upsizing the economic growth and the tax base! But, the political masters turned oblivious to the conventional wisdom that there is always more than one way to skin a cat! If the goal was to appease voters, there was no compulsion to slash the tax rates below the Revenue Neutral Rate (RNR) of 15.4%. The Chairperson at the last GST Council meeting said that the effective tax rate is, at present, down to 11.6%! Almost akin to how a popular saying goes: If you raise a snake, expect to get bitten!

Anyway, it would be foolery to form an opinion on the basis of what the Revenue collected for the month of October - Rs 1.3 lakh Crore. Sacré bleu! What the Centre and the States, as per some internally-stitched estimates, require is in the range of over Rs two lakh Crores! A mountain to climb! But what finally broke the camel's back was the humongous canyon in the compensation kitty. The prevailing collection is barely enough to meet eight per cent of what has constitutionally been promised - 14% annualised growth in the revenue. This obviously 'gaslighted' a fracas threatening a fork in the road ahead! Recriminations flew in all directions! It literally degenerated into a pitched battle - 'carnivores' vs 'herbivores'! The cooperative federalism was horrifyingly put to acid test against its inherent strength of supineness! The multilateral relations between the Union of India and the States went through many bouts of churns and tumults! Ouch! Thanks to the PMO's last-gasp intervention, the harrowing challenge was somehow overcome by resorting to borrowings from the RBI. And the same is to be paid by collecting Compensation Cess till March 31, 2026.

But what finally hammered the last nail in the 'kitty' was the pandemic. The revenue 'gulak', much to the chagrin of all the stake-holders, hit its nadir! The Centre somehow managed by riding a petro-cart and the States proved to be quick learners by piggybacking on 'fuels' to revenue. In fact, their learning has become such a stick-in-the-mud that despite the Centre slashing Central Excise duty on petrol and diesel, some States are yet to do so! A few States managed by spiking duty on liquor. Those who were not inclined to be 'intoxicated', are now keen to be 'intaxicated' if the GST Council provides them an opportunity! And this is what happened at the last Council's meeting in Lucknow. Exasperated by the sorely nagging revenue shortfall, the Council decided to eschew the traditional wisdom-laced path of penny-penny-makes-many and go for an option which may raise many devils than the Council may manage to lay down!

With the Council running out of road, it constituted a Group of Ministers (GoM) by virtually handing it over a clean slate to script a new tariff chart and, if its sagacity demands so, the tax slabs may be rubbed on the sand and new deep buckets may be recommended! No matter how many times one may read the terms of reference (ToR), the only connotation which can be discerned is - Just recommend tax rates which are 'robust' enough to upsize GST collections! Nerdily obsessed, indeed! The Council has tasked the six members of the GoM with a dinosaurian assignment - merger of tax slabs if needed; withdrawal of exemptions and parachuting one item from one slab to another with no wrinkles on the forehead! A historic opportunity for the GoM to indulge in a shade of major fiscal policy silhouette which may also result in fiscal brinkmanship! Even if a particular change in the tax rate may be viewed as fiscal banditry by the industry and trade, the Council may treat the same as fiscal salve! All such recommendations which would lengthen the distance between the tax cemetery and the GST collections, are going to be treated as avuncular and may be lapped up with both the hands!

Acutely in the know of the frothy expectations from it, the GoM has held two meetings so far and the third one is lined up coming Saturday. I am pretty sure that the TRU, which is providing the secretarial cushion along with the inputs from the Fitment Committee, would be avoiding the perilous pathway to 'taxodemic' and would harmonise the tax rates panoply to the extent it does not hurt the economy! At this juncture, let me float not just one thesis but two, for elaborate comprehension of the boggy issues involved in the large canvas of deep drilling! One thesis can be pure political in hue and character. And the other, a complete 'tax-vax'!

Let me first begin with the political premise which works on the principle - 'One kind word can warm three winter months'! Let me make it clearer before TIOL netizens begin cudgelling their brains. The Convenor of the GoM was strategically, if not diplomatically, chosen to be a BJP juggernaut. There are four members, including the Convenor, out of seven in the GoM, from the BJP-ruled States. The rest carry multiple political stripes but the common thread running among them is the expression 'Opposition'! Irrespective of the colours in the rainbow, the Opposition would inevitably think alike and also shout in unison! And the converse is also awfully true! The four BJP pharaohs would shout what their 'unified aka' would 'coo' sotto voce!

Let's now do some crystal ball-gazing! First, the timing of setting up of the GoM is certainly not auspicious! It was announced in Lucknow and the same would necessarily see the recommendations of the GoM prior to the State polls as antithetical! Undoubtedly, a treacherous policy trek for the 'debonair' of the Council! Any spike in the tax rate, that too for a large canvas of commodities, would frighteningly harm the political interests of the BJP not only in UP but also Punjab. Since the mandate of the GoM is to submit its report within two months, which is, in any case, comfortably missed, the submission of its report for the Council meeting to be held next month would trigger large-scale ructions among the industry, the trade and the Opposition, at least in Uttar Pradesh and Punjab! And it may not seem foolhardy for the anti-Yogi forces to weaponise, leave aside the hikes, even the mere announcement of such hikes to be effective from April 2022! It would indeed be akin to dropping an axe on one's own feet! In this background, if the UP Minister who is the voice of Mr Yogi in the GoM, seeks more studies to be done before any decision is taken, would tellingly be logical and politically expedient. Let's not forget the old saying - The squeaky wheel gets the grease! And the GST Council's top leadership would have to redress the grievance of the political folks sharing the same feathers!

Even the Convenor of the GoM and other two Members - Bihar and Goa - would, at first blush, espouse such a concern originating from Lucknow! Kerala is already toeing its legacy political stand of more studies before any rationalisation recommendations are made. West Bengal is caught in a state of doldrums as Dr Mitra's 'political health' does not permit him to turn radioactive on disputatious issues and the representative attending the GoM is barely and merely serious about parroting the political line 'droned' out of the Didi's windows! Rajasthan being a Congress-ruled State, has to pathologically oppose many of the ideas being debated in the GoM! A political hoopla would necessarily raise its head!

Secondly, looking at the gigantic canvas on which the GoM is mandated to 'paint' fresh tax rates, perhaps with a new brush, it needs toasty time to do justice to various groups of commodities and services rather than hurriedly going for a tax hike with skimpy research! By all standards, such an exercise is not less than 1000-pieces jigsaw! No point, tinkering with the hiked tax rates again to ease the fiscal chokehold after a hue and cry! It would be in the interest of the GST Council to extend the time-frame of the GoM by at least four months! Enough time to undertake a flurry of mathematical activities and also to catch a breeze if the neurons threaten to spiral out of control! The ideal time for coming up with across-the-board tax-rate revision would be April 2022 as the next set of state polls would be at least six months distant! My calculated expectation is that an extension of GoM timeline would serve the twin interests of the GST as well as the electoral politics which cloaks itself at the root of all such fiscal decisions!

(In the next week column I will attempt to define the size of the wiggle room the GoM has either for merger of the slabs or upsizing the tax rates across the board.)


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