Opposition, BJP should join hands in the national interest
THE passage of the much- awaited legislation to launch the new Goods and Services Tax (GST) has been stymied since May because of opposition by the Congress which has laid down several conditions for its cooperation. It was passed by the Lok Sabha but the NDA government does not have the numbers to get it approved by the Rajya Sabha, and so the Bill has been languishing there for the last six months. With the disastrous Bihar results, the NDA is well aware it cannot command a majority in the upper house anytime soon and the GST Bill could even pass into history yet again.This delay has added yet more time to the long wait for this innovative tax to be implemented. The process of formulating it began 14 years ago when Atal Behari Vajpayee was heading the earlier NDA government. Subsequently, the GST Bill was finalised by the UPA government after many tortuous years of negotiations by an empowered committee of state finance ministers. It could not be passed by Parliament, however, due to continued opposition by some states and finally lapsed with the dissolution of the last Lok Sabha. It was then revived and reintroduced by the present government earlier this year. The big problem is that being a Constitution amendment Bill, it has to be passed by a two-thirds majority in both houses of Parliament. In addition, it has to be ratified by 50 per cent of the state legislatures. But what is this much-hyped new tax? It is a single levy at the final point of consumption meant to replace the multiplicity of existing taxes like octroi, central excise, service tax and entertainment tax. It will be levied both on goods and services. Instead of taxing goods at the factory level, it is at the point of sale or supply of goods. This eliminates numerous layers of taxation at different points in the supply chain which promote corruption and tax avoidance. As many as 140 countries have adopted the GST. In most cases, revenues have risen dramatically and GDP has increased too. The National Council of Applied Economic Research (NCAER) says implementation of the GST could lift India’s GDP growth by 0.9 to 1.7 percentage points.The current impasse over the Bill hinges on three conditions laid down by the Congress for supporting the new legislation. The first is that the government should do away with an additional 1 per cent levy on supply of goods that is meant to be over and above the GST. The second is that the GST rate should be capped at 18 per cent and the third is the creation of an independent dispute resolution mechanism.The question is, are these conditions valid and justifiable or are they merely political ploys to ensure that the NDA is forced to negotiate and reach a compromise with the Congress. As far as the first condition is concerned, it is undoubtedly a reasonable demand as the additional 1 per cent levy is being sought only by some large manufacturing states like Gujarat, Maharashtra and Tamil Nadu. Their concern is that since the tax is levied at the point of consumption, it may lead to reduced revenues for them. Such an extra levy will definitely create distortions in the new tax structure as has been pointed out not only by the Congress, but also by many economists who have even argued that there is no point implementing the GST in this manner and it should be delayed till it can be launched as a single tier levy.The second condition of capping the GST rate at 18 per cent in the Bill will also be welcomed by those who first conceived of this big bang taxation reform. The original concept of the GST was that it should be a single levy. Owing to competing demands by many states and fears of loss of revenue, it has now been diluted into a two-tier tax, one at the central level and another at the state level. The impact of this dual GST is that the final level of taxation could even reach 26 or 27 per cent. Besides, some big ticket items are being left out of the purview of GST like alcohol and petroleum products since these bring in large revenues for state governments.In other words, it seems to be difficult to resist pressures from states to continue adding extra levies to the original GST and the high taxation will become a heavy burden for the ordinary citizen. The Congress proposal for capping the tax at 18 per cent in the legislation itself is thus surely a wise move, as it would be put an end to the constant lobbying by states for extraneous taxes over and above the GST. Finance Minister Arun Jaitley’s strident criticism of the condition implies that the NDA government is already preparing to give in to such pressures and raise the tax rate to extremely high levels, which is indeed alarming.The third demand for an independent dispute settlement mechanism is also not unreasonable. But this is one which can be built into the provisions of the proposed GST Council. As long as the dispute settlement mechanism is codified in a formal way, it should be acceptable not only to the Congress but to all parties. It is reported that the Congress is also opposed to the composition of the council which gives one-third weightage to the central government and the rest to the states. But this does not need to be changed as the council’s composition appears to have given adequate weightage to both the Centre and states. The present government is undoubtedly anxious for the implementation of the GST to convince both domestic and foreign investors that it is going ahead with economic reforms. This is a major reform that could lead to a significant rise in GDP growth. It is therefore not a surprise that Prime Minister Modi decided to reach out to Congress president Sonia Gandhi for a compromise formula to break the logjam.The ultimate goal should naturally be to have a tax that meets the original objectives rather than the present modified format. But even implementing the altered GST will be a huge step towards tax reform and both the BJP and Congress need to join hands in the national interest to ensure that it is launched as soon as possible.