The Constitutional Amendment Bill enabling Goods and Services Tax (GST), which was
passed by our Parliament, is indeed a milestone, as it truly represents the
biggest economic reform post the economic liberalization of 1991.
The basic
idea of ‘one country, one market, and one tax’ is now set to become a reality.
That it
would eventually see the light of the day is a foregone conclusion. But some
thoughts that need to be considered are:
- In the
pristine world of textbooks unsullied by demands of politics, a good tax
rate is one that is low and covers the widest possible base. However,
states have already negotiated for a number of exemptions on items such
as petroleum, electricity duties, alcohol, and on stamp duties on
property.
One way of
looking at it is that let the process begin, and gradually, as benefits of GST
become visible to all the stakeholders, such exemptions can be gradually withdrawn
and brought under the fold of GST. But, a reality of Indian states is that, the
development needs and the financing needs vary from states to state. Local
levies on alcohol, petroleum, electricity, and stamp duties on property are
among the common sources of revenue for the states. The challenge of eventually
financing the development needs only with the resource mobilization through GST
leaving central grants aside, would be a herculean one,
Furthermore,
these are heavy hitters on revenue front, and excluding them from the taxable
pool need not push up the rate that will ensure that the transition from the
current to the new regime keeps revenues neutral. This is possible provided
both the centre and the states, are transparent in the total revenues being
currently realized from different categories of goods and services
- Two
case studies which have been quoted in the newspapers include that of
New Zealand and Canada. New Zealand introduced GST in 1986 that followed
the copy book model with low GST rate and minimum exemptions. This led to
a quick pop in the GDP growth and revenue buoyancy. The other case study
pertains to Canada which introduced GST in 1991, and was riddled with
exemptions and riders. Canada saw a sustained dip in GDP growth right
after that.
Our tryst
with GST appears to be akin to the Canadian experiment, and it is only prudent
for the GST council comprising of : the Union Finance
Minister (as Chairman), the Union
Minister of State in charge of Revenue or Finance, and the Minister in charge
of Finance or Taxation or any other, nominated by each state government. to deliberate upon the
Canadian experiment to iron out possible problem areas, which could have have a
negative impact on our GDP in the initial phases. Similarly, it would also be
worthwhile to identify the factors which contributed to the GDP growth in the
case of New Zealand. One possible factor that comes to mind here is a robust
structure and backbone to implement GST in its intended letter and spirit,
backed by an equally robust administrative machinery that acted as a catalyst
to facilitate the ease of doing
business by reducing the number of
disputes with private citizens and businesses to the extent possible. Thus they
were left with more time and motivation to concentrate on their respective
businesses, rather than devoting most of their energies in manipulating the
system and disputes resolution,
- Besides
the fact that the Modi government would be facing the electorate in three
years from now, the fact remains that currently we badly need to focus on
employment generation via investments by the private sector. Hence, the
GST rate structure initially has be such that facilitates such macro
objective of the government. Revenue losses for the states will be
compensated by the centre, and the Finance Minister will have to ask the
states to take a leap of faith along-with him.
Now,
assuming that there is complete transparency by the states in declaring their
revenue losses, and the Centre with all its noble intentions decides to
compensate the states in their revenue losses, then what are the sources of
finance available to it besides the collections from the GST? Furthermore, what
would be the relevance of the Finance Commission? This commission acts as an instrument to divide proceeds
of divisible taxes between the states and the Union government, or in cases of
taxes that are collected by the centre but the proceeds of which are allocated
between the states, to determine the principles of such allocation,
- To
quote Swaminomics which appeared in Times of India dated 7th
August, “ Trucks in India average just 270 kms a day against 800 kms a
day in the US, because of check-post delays at the borders, and GST could
slash these. Economic optimists hope GDP will improve by over Rs. 100,000
crores.”
Removal of
delays at the check-posts due to the implementation of GST can certainly lead to
quicker turnaround times for order fulfillments, but this would be only one of
the key factors in improving the GDP by a phenomenal Rs. 1 lakh crores. The
other key factors would be the overall macro environment of the country,
speedier decision making not only at the political level, but also at the
bureaucratic level to translate the vision of the political leadership to
reality without any dilution,
- Then to
quote Swaminomics again, “The slogan ‘one India, one tax, and market’
sounds terrific but may mislead non-experts. GST does not provide for one
rate across India. Different committees have suggested different tax bands
for different sets of goods and services. Chief Economic Advisor Arvind
Subramanian headed one such committee, which suggested four tax bands –
zero for essentials, 12% for merit items, 17-18% as the standard rate for
other items, and 40% for luxuries. The GST council could set completely
different bands. Besides alcohol and petroleum products are outside GST
with each state free to set its own rate.
While it
is expected that the committee headed by the Chief Economic Advisor has indeed
deliberated upon the definitions of “essentials, merit items, and luxuries”,
besides specifying the various goods and services which would fall in each of these categories, it is up-to the
GST Council to arrive at a unanimity on the same,
- To
quote another eminent personality Swapan Dasgupta in Times of India dated
7th August, “Politically however, the suggestion that this
will force the pace of economic centralization is a half truth. In his
speech, finance minister Jaitley referred to “pooled sovereignty”. What
these catchy phrase implies is that both the centre and the states have
agreed to shed some of their own sovereign powers over revenue mobilization. However, both entities have simultaneously acquired exta-territorial
rights. Once GST comes into force, the Centre’s rights to determine the
rate of national taxes will cease to be absolute. The proposed GST Council,
in which the states together have two- thirds voting rights, will now
have a direct say in the rates of taxation. In effect, this implies that
the states have a potential veto on the centre’s powers of taxation.”
The
keyword above is “potential veto”because notwithstanding the two-thirds voting
rights, the scale in GST Council can tilt in favor of the Centre, if more than
half of our states are ruled by the coalition partners which are part of the
central government
- To
quote Swapan Dasgupta again, “Once the GST rate is set, then changing it
would be a herculean task. This would imply that Union Budgets from 2018 onwards would lose the paramount importance they now enjoy. The FMs
principal task would be reduced to determining the pattern of government
expenditure. Revenue generation would be by and large run on on auto.”
Now, would
the revenue and fiscal deficit be well under control? Perhaps, alongside it
would make sense for the Union Government to introduce Zero based budgeting,
where each expenditure made in the previous budget is evaluated in terms of the
outcomes. Going further, ahead, it would make more sense for the Union
Government to undertake a mid year review of all major expenditures earmarked
in the budget to determine if the same needs to be continued or the resources
need to be reallocated elsewhere.
- And finally, GST covers only the
indirect taxes. Would that leave the direct taxes vulnerable to the whims
and fancies of the Union Finance Ministers to indulge in populism as the
general elections draw near?
But
notwithstanding these thoughts, there can be no doubt about the fact that the
idea of ‘one country, one market, and one tax’ was long overdue, and our
respected parliamentarians cutting across their respective political
affiliations, certainly deserve a standing ovation from all of us, to have
undertaken the first major step in enabling its realization.
Now, one
can count upon other key stakeholders such as state assemblies to ratify the
same at the earliest, so that the intended deadline of 1st April 2017
can be met.
Yes,
teething troubles post 1st April 2017, are only to be expected, but
nothing can come in way of a steely resolve by all to meet such challenges and
ensuring that India is a role model where GST implementation is concerned.
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