Where’s the incentive to fix the Bill’s defects?
Given the transformative properties of the GST Bill, it would be a pity if the Congress party did not allow it to be passed by the Rajya Sabha, more so since it was the Congress that originally proposed the Bill. GST, as the Congress pointed out in vain, at that time, to the BJP states, would have been a big boon since it would replace a host of central and state levies with a single tax. In the bargain, by reducing transactions costs and providing a set-off against taxes paid, it would create a single Indian market; to the extent, all local taxes would be set off, it would ensure India’s products remained competitive, both for exports as well as against imports. That said, it is important that GST not be oversold as the greatest tax reform India has had in decades since GST is a process, not an event. It would be a travesty, in case the Bill does get passed, for the BJP to tick this off on its achievements list. As this newspaper has pointed out for a while, the odds are stacked against GST working seamlessly even after the Constitution Amendment Bill is passed. Making GST work will require constant engagement/battling with both the Centre and the states.
There is, first, the matter of the revenue neutral rate. The finance minister saying it will be below 27% sounds like a great relief, but that was always a red herring since the NIPFP report that mentioned this did so as one of the various GST rates—27% was never the central GST rate. The larger issue, as even the chief economic advisor has pointed out, is that there are many exemptions in GST which will make Indian goods uncompetitive. Since petroleum is outside the GST framework, this means any taxes paid on it—excise duty on oil machinery, for instance—will not be rebated. Ditto for taxes paid on cement and steel since real estate is outside its purview right now. Similarly, the 1% tax on supply of goods across states will cascade and end up at 4-5% once you take into account the inter-state stock transfers within firms. The belief, among finance ministry officials, has been that it is better to get the GST process going, and that this will get fixed along the way. Once states find their revenues rising post-GST, the argument goes, they will be amenable to, for instance, removing the 1% tax or to allow real estate to come under GST. As 14th Finance Commission member M Govinda Rao points out, however, no one has any incentive to fix these birth defects. The structure of the GST Council which will decide on these issues is such that the Centre can veto what the states want and if a group of states get together, they can veto what the Centre wants. In which case, it is not certain the 1% tax will go away after 2 years or whether various exemptions will go. GST is going to remain work-in-progress for years, and even if the Bill gets passed, it will require the Centre to continue to assiduously work with the states to see it to its conclusion over the next several years.