Anything but a good, simple tax (GST)


GST will undoubtedly constitute a very major reform in the structure of indirect taxation and help create a seamless national common market. Photo: Paulus Rusyanto

The goods and services tax is step forward, no doubt, but there are far too many basic questions left unanswered

The bill to amend the Constitution to allow for the introduction of an integrated goods and services tax (GST) has been referred to a select committee of the Rajya Sabha after it was passed by the Lok Sabha.

GST will undoubtedly constitute a very major reform in the structure of indirect taxation and help create a seamless national common market.

For consumers, it may mean lower prices and for industry and trade, it will definitely mean more convenience and ease of doing business.

GST has been in the making for well over a decade. It was first proposed by a committee chaired by Vijay Kelkar that was set up by the Vajpayee government and submitted its report in March 2004.

Thereafter, P. Chidambaram and Pranab Mukherjee took it forward during the United Progressive Alliance (UPA) regime and finally, the former introduced legislation in the Lok Sabha in March 2011.

Thereafter, as per normal parliamentary practice, which has now been destroyed by the Modi sarkar, the GST bill was referred to the Standing Committee on Finance headed by Yashwant Sinha, a former finance minister.

This committee submitted its report only in August 2013, taking an extraordinarily long time to finish its deliberations. The strategy seemed to be clear—delay the UPA’s GST bill as long as possible. Sinha’s committee, of course, cussedly killed the Unique Identification Authority of India Bill, the other big-ticket economic governance-related legislation of the UPA regime that would have given statutory status to Nandan Nilekani’s ambitious project to reform the welfare delivery system.
It was not just the standing committee that derailed the UPA’s plans to introduce GST.

The government of Gujarat, of which Narendra Modi was chief minister, took a very aggressive stand against the bill, arguing that the state’s interests would be hurt.

The GST bill provided for compensation to be given to states in the initial years if their revenues were adversely affected like what had happened when VAT (value-added tax) was first introduced. But Modi was completely inflexible. However, after becoming Prime Minister, Modi changed his tune and backed the GST bill. But his GST bill is different from the bill that the UPA introduced and has some features that destroy the very idea of GST.

Many tax experts have already pointed to these weaknesses and even the chief economic advisor in the Union ministry of finance has said that the latest GST bill must be reviewed.

There are at least four areas in which such a review is called for by the select committee.

First, Modi sarkar’s GST bill keeps taxes on alcohol, electricity and real estate outside the scope of GST. Taxes on petroleum also are out of GST’s scope to begin with, but here at least, the bill provides for their inclusion after approval of the GST Council that comprises representatives of the Centre and all states.

No such flexibility has been provided for taxes on alcohol, electricity and real estate, which are important sources of revenue.

Second, the latest GST bill provides for a 1% additional tax on interstate trade or commerce. This is over and above whatever the GST rate will be and is meant to meet the concerns of manufacturing states like Gujarat, Maharashtra and Tamil Nadu. But GST is destination-based taxation and this additional tax negates this most basic principle of GST.

In any case, the Centre is committed to compensating states for revenue losses for a period of five years. Therefore, in every way, this 1% additional tax, on which there is still considerable ambiguity on how exactly it is to be levied, is an aberration.

Third, we still do not know what the revenue-neutral GST rate will be. Preliminary indications are that the finance ministers of states will be happy with a GST rate in excess of 25%—perhaps at around 27%. This is a recipe for economic disaster since the maximum GST elsewhere in the world and in East Asia is 15-16%. Incidentally, India will be the only country in the world to have a dual-GST system, comprising a central GST and a state GST. The best systems elsewhere are based on a single GST model.

Fourth, the GST Council that is provided for in the bill will be crucial to all decision-making. This council has the widest possible authority and has been empowered to recommend the GST tax base and the rates, exemptions, thresholds and other operational parameters. However, as has been pointed out by some experts like V. Bhaskar, the power of the GST Council has not been made part of the Constitution amendment bill.

There is also some inconsistency as some provisions speak of the “decisions” of the council, while others speak of its “recommendations”. Disputes will be inevitable and hence the UPA’s GST bill had provided for a credible dispute settlement mechanism.

Unfortunately, such a mechanism has been dropped in the new bill being piloted by Arun Jaitley.
Of course, GST stands for goods and services tax, but it really should be seen, as noted tax expert Satya Poddar said recently, as a good and simple tax.

As proposed in the current bill, GST is certainly not such a good and simple tax. It is a step forward no doubt, but there are far too many basic questions left unanswered.

The select committee of the Rajya Sabha is headed by the very sober and knowledgeable BJP leader Bhupender Yadav. Hopefully, he will not rubber-stamp what his senior colleague the finance minister has brought forward, but will use this opportunity to rectify the bill’s structural defects.

The country definitely needs a GST, but this is not it. It is now up to Yadav and his colleagues to rise to the occasion and get the Rajya Sabha to do what the Lok Sabha was not allowed to do in the exuberance of the finance minister to claim quick victory.

The author is a former Union minister and Rajya Sabha MP.

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