Tax experts warn that states may pull back support and jeopardise the GST Act at the stage where it had to be ratified by 50% of the state assemblies.
The key to the passage of Constitution Amendment Bill for Goods and Services Tax (GST) in the winter session of the parliament is the Prime Minister Narendra Modi-led government giving in to the Congress demands, but most tax experts feel these were not without repercussions.
Amit Kumar Sarkar, partner, Grant Thornton India LLP, says while the opposition’s recommendations come with “good intentions”, they are wrongly timed, illogical and can be debated even without holding the clearance of the Constitutional alternation in the Upper House.
“These demands are good and come with good intentions, but badly timed, illogical and something that can be debated if both parties (BJP and Congress) sit down and discuss them,” he said.
Sarkar further argued that there was “no two ways’ about the economic benefits of some of the Congress’s suggestions but one had to watch out for the pitfall, where states may pull back support and jeopardise the GST Act at the stage where it had to be ratified by 50% of the state assemblies.
“There is no two ways about the fact that if these demands are accepted it could further the economic gains but all state governments have to agree. What, if to placate the Congress, you spoil your conversation with the states and are forced to go back to the drawing board. The GST policy makers, the empowered committee (of state finance ministers), may just move away their support to bill,” he said.
On a cautionary note, Sarkar said, “Remember, once it is passed in the Parliament, it also needs to be ratified by 50% of the states. If some state finance ministers block the bill at the state level, we will be back to square one. In fact, what is one problem today, will become 30 problems.”
The three major demands of the Congress are: scrapping of 1% additional tax for producing states, capping revenue neutral rate (RNR) for GST at 18% and including it in the Constitution and setting up of separate dispute resolution mechanism instead of GST Council handling it.
Ranen Banerjee, leader, public finance, PwC India, believes doing away with 1% additional tax would be good as producing states would not have to incur unnecessary additional administrative cost on it.
Sarkar, however, said it was an illogical demand without an alternative as it would then result in status quo in current entry tax and octroi, for which there is not compensation under the GST.
“It is actually the lesser of the two evils. If you have an entry tax, that could be worse than having an additional tax,” he said.
Elaborating on the issue, he said, if the entry tax compensation was allowed, then, besides the 6-7 states that currently have this levy, other states would introduce this tax before bringing in GST. This would immediately push up the government compensation outgo to the states dramatically. Whereas, the additional tax of 1%, which will go only to producing states, will keep the compensation lower and will exist for only two years.
The current Constitution Amendment Bill has made a special provision to introduce additional tax of up to 1% for two years.
“This (inclusion of the 1% additional tax) means if the government wants to increase it by even one more month, it will have to amend the Constitution. Since, it (additional tax) is only for two years, it is a cost the industry will be able to absorb,” he said.
Grant Thornton consultant said if the Congress was recommending abolition of the 1% additional then it must come up with an alternative for it.
Both Sarkar and Banerjee felt the demand of 18% cap on RNR to be included in the constitution was whimsical.
“Putting a rate in the Constitution would make it very rigid because whenever any rate change would be required, then it will have to go through the entire long-drawn process of Constitution amendment,” said the PwC tax expert.
Today, other taxes, which get revised annually, are part of the Finance Act. If the RNR is brought under this Act then it would be easier to review it in future.
Lastly, on the GST dispute resolution mechanism in the Constitution, Sarkar said while he agreed it was not ideal for every issue, debate and discussion over the tax to be handled by GST Council, this demand could be raised later and not at the stage of the Constitutional amendment.
“That is a reasonable demand but does this demand need to be presented in the Constitutional Amendment Bill itself? This is the Constitution of the country, not a tax Act. They could very well bring the demand during the enactment of the Inter-State GST (IGST) Act, Central GST (CGST) Act or State GST (SGST) Act, or a separate national tax tribunal, similar to what has been envisaged under the current sales tax, can be created,” he suggested.
Additional, Banerjee believed inclusion of petroleum and petroleum products in the GST would positively impact inflation rate.
“Whenever states would be under the pressure to meet revenue targets, they will find this (items not under GST) as an area where they can impose additional taxes. Consequently, you know that petroleum products have huge impact on inflation,” he said.