Goods and services tax: Will the govt be able to push it through?


The National Democratic Alliance takes one final shot in its first term at enacting a goods and services tax that will dismantle inter-state barriers to trade and create a united market of 1.25 billion people.

GST, billed as the biggest tax reform India has ever undertaken, promises to take centre stage.

New Delhi: It has been in the works for a decade now. It was in early 2006 that then-finance minister P. Chidambaram proposed India’s most ambitious tax reform—a goods and services tax (GST) that would dismantle inter-state barriers to trade and create a common market of more than 1.2 billion people.

Chidambaram set a deadline of 1 April 2010 for GST to kick into force, mandating a panel comprising state finance ministers to prepare a framework for the tax that would subsume a slew of central and state levies and lead to true economic union in the world’s second most populous nation.

That didn’t get done because consensus proved impossible and the Congress party-led United Progressive Alliance (UPA) government was so deeply embroiled in firefighting corruption scandals in its second term (2009-14) that economic reforms figured fairly low on its priority list.

Now, Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government is taking one final shot at enacting GST in its first term after being stymied by the Congress-led opposition from winning passage for a bill that would enable the reform.

The NDA is seeking to push the Constitution amendment bill in the monsoon session of Parliament from 18 July to 12 August.

“We hope the GST bill will be passed during the monsoon session of Parliament. There is a broad consensus on the bill, with almost all state governments and political parties favouring it,” then-parliamentary affairs minister M. Venkaiah Naidu said on 30 June.

Ananth Kumar, who took over the portfolio from Naidu in a 5 July cabinet reshuffle, lost no time in reaching out to the Congress party, calling Ghulam Nabi Azad and Anand Sharma, leader of the opposition and deputy leader of the Congress, respectively, in the upper House.

“The initiative has come from the government, they asked us for a meeting and we have agreed. We believe there should be a constant dialogue. We have been told the meeting may happen over the next two days or in this week. There is no pre-fixed agenda of the meeting,” Sharma said on 11 July.

The NDA’s lack of a majority in the upper House has scuttled the government’s attempts to push the legislation in the little more than two years it has been in power.

A broad consensus on the proposed law was reached at a meeting of state finance ministers in Kolkata in June where the NDA accommodated most of the demands raised by states. In the process, the Congress was isolated. That has given the government the confidence that it can push the bill through this time.

Painstaking process

There is a reason for urgency. The government of Prime Minister Narendra Modi wants to implement GST starting 1 April 2017, the onset of the next fiscal. To do so, it needs to win Parliament’s approval for the 122nd Constitution amendment bill in this monsoon session because of the time-consuming and painstaking legislative process that follows next.

To be sure, the government can implement GST from the beginning of any month in 2017 and not necessarily at the beginning of a fiscal.

But delaying the implementation further to the final year of its five-year tenure may not augur well for the government, given the potential short-term inflationary impact of the tax and the resultant confusion and uncertainty from such a major taxation overhaul.

“GST is a transactional tax and can be implemented from the beginning of any month and not necessarily from the beginning of a financial year. So, GST can always be implemented from 1 October 2017 if the 1 April 2017 deadline is missed. But if it gets delayed beyond 1 October 2017, its implementation may be pushed beyond 2019 when a new government comes to power,” said Pratik Jain, who heads the indirect tax practice at PricewaterhouseCoopers India. “In the short term, there could be some inflationary impact of the tax. This is because the tax rate on services is likely to be higher and it might take some time for the businesses to pass on the benefit of lower costs to the consumers,” he added.

If the government were to fail to push through the bill in this monsoon session, it may well mean passing the baton (and credit) for implementing GST to the next government that gets elected in 2019.

“Most states have been on board for a while, with a few holdouts; the structure of state-centre fiscal mash-up has already been clearly set out and the states have a lot to gain from this. It will happen, but we will see when. We are more optimistic now for this current session than before,” said Jon Thorn, co-founder and director of India Capital Fund Management Ltd.

Reforming taxation

GST will alter India’s federal tax system and unify the country into a single common market. It will subsume all indirect taxes such as excise duty, service tax, value-added tax, luxury tax, central sales tax, entertainment tax and entry tax.

According to experts, GST has the potential to add 2 percentage points to India’s gross domestic product, or GDP, raise the tax base by checking tax evasion and remove double taxation of goods, thereby reducing costs for firms and making Indian companies more competitive globally.

It will also improve the ease of doing business as companies will not have to go through the hassle of paying multiple taxes and filing numerous tax returns.

GST proposes to change the way the central government and India’s 29 states tax goods and services. Under this destination-based tax, states will get power to tax services and the centre will be able to tax the sale of goods. At present, the centre levies a tax at the time of manufacturing of the goods and on services.

A Constitutional amendment is needed to bring all these change to effect. The problem is that a Constitution amendment cannot be passed by a simple majority like in the case of routine legislation.

A Constitution amendment bill needs to be passed by a two-thirds majority in both Houses of Parliament. While the 122nd Constitution amendment bill has been passed in the Lok Sabha—or the directly elected House—in May last year, it is pending in the Rajya Sabha, or the indirectly elected upper House where members are elected from each state legislature. After it is cleared by Parliament, the legislation needs to be ratified by half of India’s states.

Tax trade-offs

The main stumbling block is the lack of numbers for the ruling NDA in Rajya Sabha, or the House of elders, as it is called. The ruling NDA has 72 members in the 245-member House. It needs the support of 164 members to pass the legislation.

Sure, the numbers have become more favourably inclined for the NDA over the last couple of months after re-elections to the upper House.

The Congress, with its 60 seats, and the ruling party in the southern Indian state of Tamil Nadu—the All India Anna Dravida Munnetra Kazhagam (AIADMK)—with its 14 members do not support this bill in the current form.

The Congress has a list of three demands it wants to be met—doing away with a proposed additional 1% tax on inter-state sales, capping the GST rate in the Constitution amendment bill at 18% and introducing an independent dispute resolution mechanism framework.

The 1% additional tax on inter-state sales was proposed as manufacturing states such as Gujarat and Tamil Nadu contend that they, having spent money on putting up infrastructure, would lose out on revenue as GST is essentially a destination tax.

Finance minister Arun Jaitley has assured the states that the centre would make good the revenue loss they risk from GST for five years in return for scrapping the additional tax. The case for GST has improved because dissenting voices within the Congress are becoming louder, and could cause the party’s resistance to crumble in the monsoon session.

Still, what if the Congress decides to stick to its guns? The government, numerically at least, stands a chance of getting a two-thirds majority in the upper House if it is able to consolidate all non-Congress, non-AIADMK parties.

But then, national and regional equations come into play. Parties such as the Janata Dal (United) and the Rashtriya Janata Dal are in alliance with the Congress in the state of Bihar and, together, their 12 members of Parliament (MPs) may make a difference in the final vote count. And so will the way the nine MPs of the Communist parties vote.

“The chances of the bill getting passed have improved as compared to the earlier sessions, with regional parties expressing support for the bill. But there is no guarantee as concerns of states remain,” said Abhay Kumar Dubey, a New Delhi-based political analyst associated with the Centre for the Study of Developing Societies. “All producing states will face loss of revenue. But who will cover that loss after the initial five years? Modi and Amit Shah (BJP president) haven’t taken along many regional parties, given their strong numbers in Lok Sabha. So, which regional party will support the bill still is not clear,” he said.

Referring to the support of all state finance ministers to GST, Dubey said states agreeing to GST is different from floor coordination in Parliament, which so far the BJP has not managed.

“Probably a change in the parliamentary affairs minister effected earlier this month will help,” he added.

What next?

Once the Constitution amendment bill is passed by Parliament, it will be sent to the states for ratification. At least 50% of Indian states need to endorse the legislation for the changes to come into effect. With most states supporting the current version of GST, it should be smooth sailing for the government.

This will be followed by other legislations that will spell out the final design of GST. The centre will have to pass a central GST bill and each state will have to pass its own state GST legislation to bring the tax into effect. A separate integrated GST law will also have to be legislated to tax the inter-state movement of goods.

A GST council comprising the Union finance minister and finance ministers of all states will be set up and will take decisions on all important issues such as the tax rate under GST and the items to be included or excluded from the tax within the Constitutional framework. It will also decide on disputes that may arise between the states.

Once all the legislation is enacted, the government will notify the rules detailing the fine-print of the law’s implementation.

The information technology backbone of the tax—the GST network—will also alter its systems to come in sync with the final design of GST.

GST envisages a complete transition to an online taxpayer registration, payment and tax return and refund system to minimize the interface between taxpayers and the tax officials to check corruption.

Far from perfect

GST’s implementation will improve India’s image internationally and be welcomed by investors, rating agencies and multilateral institutions. Many countries in the world have successfully moved to a GST regime, including Singapore, New Zealand, South Africa, Japan and Australia.

To be sure, the Indian model of GST is far from perfect. For one, it will not have a single rate and will be implemented with at least three rates in the beginning.

It also has many exclusions like petroleum products, alcohol and electricity brought in to appease various states. Consequently, the tax rates under GST cannot be kept low as it will impact finances of the centre and the state. This is likely to have an inflationary impact as it will push up the prices of many items. This will impact the entire population as indirect taxes by nature are not equitable and are levied irrespective of your income bracket—politically suicidal for any government.

The tax rate under GST may be anywhere between 18% and 27%. While a central government-constituted panel has proposed a standard rate of 18%, a think tank appointed by the states has recommended a 27% standard rate. The final tax rate, most probably a compromise between both these rates, will be higher than the prevalent tax rates, at least for services.

In addition, the service industry, especially telecom firms and financial institutions, will be burdened with too much compliance on account of multiple registration needs in each state that they will operate.

“A good GST will increase tax compliance, simplify tax administration, boost GDP and investment and increase the tax base by uncovering the underground economy,” said Satya Poddar, tax partner at EY. “But the way the Indian GST is designed, its implementation is going to be a horror story, not only from a point of view of implementation and administration but also in terms of the political fallout,” he said.

“The revenue-neutral rate has still not been decided. There are differences. Problems will be plenty when it will be decided what will be taxed at the lower tax rate and what will be taxed at the standard rate,” he added.

Multiple slabs

A revenue-neutral rate is a single rate at which there will be no revenue loss to the centre and states in the GST regime

The central government panel headed by chief economic adviser Arvind Subramanian had proposed three tax slabs for taxing goods—a low tax rate of 12% for staples in the common man’s food basket, a higher tax rate of 40% on so-called demerit goods such as luxury cars and aerated beverages and a tax rate of 17-18% for all other foods and services. “The textiles industry is clamouring for a 12% tax rate. So are processed food manufacturers. Items like saris, sugar, biscuits are sensitive and taxing them at high rates can lead to controversies. If more items are put in the 12% basket, then the standard rate cannot be 18%. It will have to be higher,” he said. “It will be a nightmare for the services sector as compliances will go up for each company from less than 20 per annum to up to more 1,000,” Poddar said.

Kumar of CSDS agreed. “The increase in service tax will hurt our pockets. The government will find it difficult to combat the political fallout.” he said.

N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, said the final impact of GST can only be gauged once the shape that it will take becomes clear.

“What will be the revenue-neutral rate that will be fixed? There is wide difference between the two committees that have calculated the GST rates. The impact on inflation will be dependent on the final shape that the bill will take,” he said. “If the bill does not get passed in this monsoon session, then 1 April 2017 may not be possible. But nothing stops the government from bringing in GST beyond this date, say like in 2018,” he said.

Source: Live mint / Remya Nair

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