Finance minister Arun Jaitley admitted the other day that the target date of April 1, 2017, for operationalising the goods and services tax (GST) was “very stiff”. This is probably the understatement of the year. Even if Prime Minister Narendra Modi were to agree to relax the deadline, it would still remain “stiff”.
Reason: it is the politics of GST implementation that is daunting. The mechanics of implementation – getting the GST Network up and running, training tax officials to handle the new system, and nudging companies to install the necessary software and hardware at their ends – will be hard enough. But the politics will be a minefield.
In all the euphoria about the passing of the GST constitutional amendment bill by both Houses of Parliament and 17 states – all done in record time once the PM put his personal prestige on the line to get it done – what we have forgotten is the reality that GST needs a huge change in political attitudes to work smoothly.
Make no mistake, GST is as huge a political project as the European Union once was. Despite memories of two World Wars it took the core countries of Europe seven years from 1951, when the European Coal and Steel Community was formed, to 1958 when they agreed to the broader vision of a European Economic Community (EEC). It was political leadership that enabled the EEC to finally morph into the European Union of today. And we still ended up with a euro crisis, a near-Grexit and a definitive Brexit this year.
India will face a similar challenge with GST, for it is a one-way street: easy to get in, but almost impossible to get out.
Unlike the EU, India is already a common market of sorts, but our politics has been so fractious that one can hardly call it a congenial setting for the creation of pooled sovereignty on indirect taxes – which is what GST is all about. What GST has done is effectively include indirect taxes in the concurrent list – without actually doing so.
Instead, we will have a GST Council that will determine all indirect tax rates in the country. Both Centre and states have lost control of their own tax sovereignties, and have agreed to join a 30-legged race to fix rates by consensus – one Centre and 29 states, not to speak of Union territories.
But for the accident of Modi deciding to own the GST idea, and the fortuitous circumstance of BJP ruling key industrial states (Gujarat, Maharashtra), one can wonder whether the political resistance to GST would have been overcome that easily.
It is also worth observing that among the 17 states that passed the GST Bill, only two tiny Congress states – Himachal Pradesh and Mizoram – did so. Karnataka, the biggest Congress-ruled state, did not bother. And Mamata Banerjee’s Trinamool Congress cancelled a planned vote on GST, apparently to send a message to the Modi government.
With the President signing the constitutional amendment into law the stage is set for forming the GST Council, but Jaitley said “there are obviously some pending issues which the council will have to resolve … if we are able to successfully transact those issues, the legislations will be introduced in Parliament in the winter session”. Note the big “if” punctuating his sentence.
Jaitley’s talk of “pending issues” is another understatement. There are huge political issues left unaddressed and these include, first, fixing rates for hundreds of products and services, arriving at a dispute settlement mechanism, and agreeing on how states will be compensated for revenue losses. There are already reports that some states may be bumping up their current value-added tax revenues since compensation will be on the basis of past revenue collections. If states are already gaming the system, surely there will be a political fight ahead on compensation.
The biggest scrimmage will be on rates. Currently, it has been assumed that there will be only three basic rates – a standard rate, a merit rate and a luxury rate. Then there will be zero-rated essentials. But it may make more sense to start with four or five rates, and allow rates to converge to three once the revenue flows are clearer.
Consider also the optics of rate fixing. The general expectation is that when GST comes in, car prices will fall. But politically it makes no sense to let cars, ACs and plasma TVs (all “luxuries”) to become cheaper when everyday goods and services (mobile bills, bank and insurance charges) will rise. It will be seen as another giveaway to the rich. It may make sense to fix the top service and goods tax rates at different levels, since services have fewer setoffs than manufactured goods.
Also consider the huge scope for politicking if one state thinks it has got a raw deal, and makes it a political issue. Everybody will then jump in to lay the blame at BJP’s door.
GST is good. But it is best to phase it in, after obtaining a proper consensus and not just a weighted majority vote in the GST Council (where 75% is required to get anything passed). Since GST is a huge political time bomb, it is best to defuse it by opting for more compromise in the beginning, and cleaning up the incongruities later once the system adjusts to it. Full implementation by July 1, 2019, would be the best politically plausible deadline.