The long awaited Goods and Services Tax has taken nearly 14 years to reach Parliament. The GST Bill has been passed by the Lok Sabha but now awaits clearance in the Rajya Sabha. It is here that an impasse has occurred as the NDA does not have a majority in the upper House and needs help from the Congress to pass the Bill which is a major economic reform. The problem is complicated by the fact that it is a Constitutional Amendment Bill which requires two thirds majority for passage and will then have to be ratified by state legislatures.
A hue and cry has been made over the Congress imposing three conditions for supporting the Bill. Finance Minister Arun Jaitley has even described one of the conditions as “preposterous”. This is the proposal that a cap of 18 per cent should be kept on the tax. The criticism is that this would force the government to seek parliamentary approval every time it seeks to change the tax percentage.
The other conditions laid down by the Congress are getting rid of the one per cent tax over and above GST for manufacturing states and the provision of an inter stage dispute resolution mechanism.
As far as the condition for capping the tax at 18 per cent is concerned, contrary to the criticism, it is a wise and well considered move. It must be recalled that the entire delay in bringing this tax into reality has been due to pressure from state governments who were worried about impact on their revenues. This is despite the fact that the central government will be compensating states over a five year period for any perceived loss of revenues due to the GST. Even so, negotiations by the erstwhile empowered committee of state finance ministers were tortuous and extremely slow owing to competing demands by state governments.
Owing to pressure from states, the GST is now being implemented in a modified version. Instead of a single tax, it now has a central GST component and a state GST component. There are even rumours that the GST, as a result of these changes, could be as high as 26 or 27 per cent, a huge burden for the common man. Several economists have decried this modification and suggested that it should be scrapped and only introduced in the original format. In addition, there is the proposal to have an extra one per cent levy to satisfy manufacturing states like Maharashtra, Gujarat and Tamil Nadu who fear loss of revenues.
In other words, there is a real prospect of states putting pressure on the centre in future for an increase in the GST rate. By capping the tax rates in the law, it will be possible for the centre to resist such pressures and keep the tax rate at a reasonable level which the ordinary citizen can afford to pay. Jaitley’s angst over the proposal indicates that his party is already preparing to consider revisions in the rate, which is surely alarming.
As for the other condition, even the BJP is prepared to accept the withdrawal of the extra one per cent levy meant for manufacturing states as it is clearly a distortion in the GST tax structure. The third condition of an interstate dispute resolution mechanism being included in the Bill is one that can be resolved through compromise.
Both parties need to reach a compromise formula on this issue as the launch of the new tax may have dramatic implications for the economy. It is meant to be single levy at the final point of consumption meant to replace the multiplicity of existing taxes. Instead of taxing goods at the factory level, it is at the point of sale or supply of goods. As many as 140 countries have adopted GST. In most cases, revenues have risen dramatically and GDP has increased too. It is estimated that GST could lift India’s GDP growth by 1 to 2 percent. To achieve this objective, the BJP and the Congress need to join hands and ensure that it is launched as soon as possible.
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