Given the years that negotiations have been taking place, an imperfect Good and Services Tax regime is at least more preferable than having no GST. Course-corrections can happen once the system is operational
The idea of introducing the goods and services tax in India was conceived in February 2006. It was decided later to adopt the dual GST model where the tax would have two components — Central GST and the State GST, to be levied and collected concurrently by Centre and the States respectively. Being a destination-based tax, the State’s share of the SGST was to accrue to the destination-State in case of inter-State movement of goods and services. Since the existing provisions of the Constitution do not authorise such joint levy by Centre and the States, it became imperative to amend the Constitution. But right since its conception, endless negotiations between the Centre and the States continued, and the 115th Constitution Amendment Bill, introduced by the UPA Government in April 2011, could not make any headway.
Negotiations resumed after the NDA Government took over. But the States continued to demand the following: Exclusion of petroleum and petroleum products, alcohol and entry tax from the ambit of GST; fiscal autonomy in terms of power to vary the State GST rate within a narrow band, and a constitutional provision for compensation to the States for loss of revenue after introduction of GST.
As the negotiations reached a dead end, Union Minister for Finance Arun Jaitley broke the stalemate by making some necessary compromises, and came up with the present 122nd Amendment Bill. First, the Bill has proposed the empowerment of Parliament and the State Legislatures to levy and collect GST. Second, the Bill has provided for certain existing Central and States indirect taxes to be combined into one tax ie GST. The taxes to be thus subsumed will include the Central Excise Duty, the Service Tax, the State Value Added Tax and a host of other State taxes like Entry Tax, Luxury Tax and Entertainment Tax. The Bill also provides for the creation of a GST Council comprising State Finance Ministers, chaired by the Union Finance Minister. The GST Council has been proposed to be all-powerful in recommending to Parliament and State Legislatures on issues that will include GST laws, GST rates, exemptions, threshold limit of turnover and resolution of disputes.
Coming back to the compromises, the Finance Minister defined GST in the Bill as “any tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption.” Thus, Mr Jaitley excluded alcohol from the ambit of GST but not petroleum and petroleum products, and the entry tax. However, in order to please the States, he left it to the GST Council to decide on the date from which the GST rate will be applicable on petroleum and petroleum products. The exclusion of these items will, no doubt, erode the tax base, and knock them out of the GST credit chain. However, it goes to Mr Jaitley’s credit that, constitutionally, he has been able to keep petroleum and its products within the GST.
On the States’ demand for more fiscal autonomy, Mr Jaitley proposed for an elbow room to the States by allowing them to vary the SGST rate within a very narrow band. That’s how he earned the trust of the States. He also conceded the States’ demand for a constitutional provision for compensation by the Centre in case of loss of revenue by the States.
Besides, to please the predominantly manufacturing States, the Bill has also proposed imposition of an additional one per cent tax on all inter-State movement of goods and services. This tax will be collected and kept by the manufacturing origin States. This is against the basic principle of GST that the State’s share of GST will accrue to the destination State. In this scheme, input tax credit of one per cent will not be available and, therefore, with each inter-State movement there will be cascading of taxes leading to inflation. Moreover, at each State border there will be inevitable compliance costs — both visible and the invisible. Thus, this tax will undermine the growth of the common economic market. In fact, this method of compensating the manufacturing States is not necessary, since, in any case, the Bill itself envisages compensation by the Centre to the States in case of revenue loss.
In this context, one may remember that there is an element of equity embedded in the GST. During inter-State movement of goods and services in GST regime, say from Gujarat to Bihar, the States’ share of GST will move from the manufacturing origin State like Gujarat to the destination consuming State like Bihar. With such enrichment over a period of time, the less industrialised States like Bihar will be able to spend on development of infrastructure which, in turn, will attract industries there. Thus, the industrially-backward consumption States will also become industrialised soon.
On the readiness for the GST with respect to both tax-men and taxpayers, a lot of ground is yet to be covered. Importantly, GST Net, the information technology hub that will provide a common portal for the taxpayers and tax-men to interact, will have to be operationalised well before the target date of April 2016. Also, since the Centre and the States will have similar legislations and uniform procedures, the model laws, rules and related business processes will have to be finalised soon. Finally, before embarking upon a reform of this magnitude, the Government must release all important documents relating to GST laws, rules and procedures in the public domain, and get feedback from all stakeholders. The public will know better where the shoe is likely to pinch. The Government will have to inspire taxpayers, and earn their trust to make GST reforms successful.
There is a criticism that the proposed model of GST is fractured due to compromises made at the insistence of the States. Compromises do become necessary in federal democracies, and as a corollary, the compulsions of democracy more often than not lead to incremental reforms, and not necessarily a big leap forward.
Let’s look at the merits of the GST. First, by doing away with multiplicity of taxes, the multiple collection points, and hence multiple points of contact between tax-payer and tax-man will go. This will reduce the compliance cost of tax-payers. Second, by subsuming different taxes, the GST rate will be much less than what a consumer pays today, individually, on all these separate taxes. These two events will bring down the cost of the goods and inflation. Third, by breaking the barriers of Entry Tax and different VAT rates in different States, the GST will ensure free inter-State movement of goods and services.
A purist may not like these compromises. But, it’s time to move forward with an ‘imperfect’ GST and hope the all-powerful GST Council will make course corrections at the earliest.
(The writer is former Chairman of Central Board of Excise & Customs, and author of the book, ‘GST in India…’)