Finance minister Arun Jaitley on Friday said fixing an 18% cap on the goods and services tax (GST) rate suggested by the Congress would result in a flawed system that could lower duties on a host of “sin” products and luxury items.
The finance minister’s remarks came at a time when the government is engaged in a dialogue with the Congress-led Opposition to hammer out a consensus to pass the Constitution Amendment Bill for rolling out the GST.
The GST, billed as India’s most ambitious tax reforms, aims to stitch together a common national market by dismantling fiscal barriers among states. Once implemented, it will replace layers of local levies such as valued added tax (VAT) and octroi by a single nationwide tax.
The 122nd Constitution Amendment Bill, which was passed in the Lok Sabha in May, has remained stuck for want of political consensus in the Rajya Sabha, where the ruling BJP does not have a majority.
The Congress, which had for years advocated the need for a country-wide indirect tax system, has insisted that the GST rate should be capped at 18% in the legislation itself. It also wants the government to remove the 1% “entry tax” aimed to benefit the so-called “producing states” such as Gujarat and Tamil Nadu. Besides, it wants a more empowered dispute resolution mechanism stipulated in the bill itself.
The government has indicated its willingness to remove the “entry tax”, but placing a ceiling on the rate has remained a contentious point.
Last week, Prime Minister Narendra Modi invited Congress chief Sonia Gandhi and former Prime Minister Manmohan Singh, to discuss a way out of the logjam.
Jaitley said the government will be able to meet the extra spending for higher salaries for central government employees based on the seventh pay panel recommendations.
The Seventh Central Pay Commission has recommended an average 23.55% increase in emoluments of central government employees, including salaries, perks and pensions, a move that brightens the prospects of a sharp boost in the earnings of 4.8 million workforce and 5.5 million pensioners.
The government’s total spending on employee payouts will rise by Rs 1.02 lakh crore. Of this, expenditure on pay will go up by Rs 39,100 crore and allowances will go up by Rs 29,300 crore, while revised pensions are set to cost the exchequer Rs 33,700 crore.
The government’s overall payout will be lower because of no arrears this time, compared to the previous pay commission, which came in late.
“I am not particularly worried about meeting the fiscal deficit targets,” Jaitley said. “This year, the fiscal deficit target will not only be achieved, but also the quality of fiscal deficit will be far better.”
The finance minister said as the economy expands, the government’s ability to absorb such spending spikes also increases.
He likened the finance ministry’s task to that of a housewife, who has to juggle multiple objectives with limited resources.
“Just as a housewife does, we keep on saying no to demands for spending, but still manage to find out money from hidden sources to keep everyone happy.”
He said rationalization of subsidies have been one of the biggest uncelebrated reforms of the Narendra Modi government.
Last year, the government lifted state controls on diesel prices and brought down subsidies on cooking gas. This allowed the government to earmark extra funds to upgrade India’s infrastructure sector.
Special excise duties collected from petrol have yielded dedicated revenues for building rural roads and highways, two sectors that have been severely hit by delays and funds crunch over the past few years.
Niti Aayog, which has replaced the Planning Commission, does not need constitutional sanctity to carry out its mandated tasks, Jaitley said. Unlike the Planning Commission, state chief ministers have a greater say in the Niti Aayog on deciding on programmes and resource allocation.
Jaitley praised former Prime Minister Narasimha Rao and then finance minister Manmohan Singh for introducing reforms in 1991 that steered the economy out of a major foreign exchange crisis. “Successive finance ministers have broadly adopted the same approach and left their footprints,” he said.