GST Bill on Wednesday: A good day for Indian economy, but just the start of a long journey

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The ambitious Goods and Services Tax (GST) Bill has been listed for discussion in Rajya Sabha (RS) for Wednesday, finally.

It was crucial for the critical amendment to come in as early as possible with only ten days left for this session to end. Not just the big political parties, but also the smaller ones would want time to debate the crucial Bill that will bring about the biggest change in the country’s tax structure since independence from British colonial rule.

Since there are key amendments in the original draft of the Bill that was passed in Lok Sabha last year, the GST Bill has to, once again, go back to Lok Sabha once the Upper House clears it, though it is largely a technicality. In the RS, two third of the members (163) will have to support the Bill. Last week, the Cabinet had cleared the major changes.

The GST discussion will be a time-consuming, complex rollout. There are a few key amendments that are likely to come up for discussion on the GST Bill on Wednesday. These include changing the wording on the matter of five-year compensation to the states (the government has now promised full compensation to the states not partial as offered earlier, inclusion of a clause that serves as the “guiding principle” determining how the rate would be calculated, doing away with the one percent additional tax [which was a bad idea from day one and would have killed the whole purpose of a single tax regime], and work out a model to strengthen the built of the state dispute resolution mechanism, and, probably, working out a definition for the concept of revenue neutral rate (no loss, no profit tax rate for states).

The good news is on almost all these issues — the BJP now has an understanding with Congress and other regional parties, except, AIADMK, whose dissent doesn’t really matter now since the Congress is on board.

Once these amendments are passed in the RS and the revised Bill is sent back and cleared in the Lower House, then the long process to implement the final version will begin. The biggest exercise is that state governments, at least half of them, will have to ratify the GST Bill in their assemblies. At this stage, there is likely that several points of contentions and clarifications will be sought by the states as they look at the change in the transactional tax regime at the implementation level.

Once implemented, the GST will replace all versions of indirect tax levies including VAT, octroi, excise duty, service tax and any other state-level taxes. This is a big exercise and putting in place the systems to implement this will take months. Though bigger states are on board, the GST Bill will have to go through several other smaller states where practical implementation issues will play a bigger role than politics.

Till this time, there is no clarity on what will be the final rate structure will be. With the Congress’s demand of inclusion of GST rate in the Constitution, outright rejected by BJP and bigger regional parties like RJD and TMC, the rate might find place in the supporting legislation that will come up after the constitutional amendment.

The right to decide the GST rate, based on the larger “guiding principles” outlined in the constitution, is likely to be with the joint GST council that will have participation from both the Centre and states. This is a saner way than making the rate part of the Constitution, in which case making changes is difficult in the event of any exigency. But what will be the final rate is still a guess work at this stage.

As Firstpost has highlighted earlier, too high a rate will hurt the service industries and consumer and the opposite will kill the revenues of producing, manufacturing states. All this while, there has been huge lobbying by manufacturing states to keep the rate at the higher end.

What about the common man? He will see pain on the household kitty in the short term if the rate is kept too high, one reason why a section of experts have been cautioning on the over-hype attached to GST. But, the idea is to bring down the overall cost of goods and services since manufacturers will be freed from the burden of multi-level taxes and the tax will be levied only at the destination.

The larger consensus on the standard GST rate is 18-19 per cent. A panel headed by chief economic advisor Arvind Subramanian had recommended a revenue neutral rate of 15-15.5 percent and a standard-rate of 18 percent. It has also recommended a three-tier rate structure for GST under which essential goods (those impacts the common man most) can be taxed at a lower rate of 12 percent, demerit goods like luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 40 percent and the rest at a standard rate of 17-18 percent.

The standard rate is the rate which majority of the goods and services will be taxed. As against this, the NIPFP had proposed a standard rate of 23-25 per cent. Once the key amendments, which will lay out the larger contours of the Bill is done, the next important question will be the final rate being arrived at.

The point here is passage of GST Constitutional Amendment is only the beginning of a long journey to meet the implementation date of April, 2017. There is a long, complex process that will follow.

Next year is crucial with a few states including Uttar Pradesh and Punjab going for polls. One needs to wait and watch whether the NDA-government indeed manages to kick start the GST regime within the stipulated deadline (already delayed by a year). Chances are that the roll out will overshoot the April deadline. But, the good thing is that both the Congress and BJP have set aside political bargaining and have joined hands at the moment to create a history by ushering in a unified tax regime. This will bring in much needed transparency, trust in the economy and higher investments in the approaching years, hopefully adding a few percentage points to India’s GDP through higher tax revenue and investments.

The next big challenge for the Narendra Modi-government is to get the states on board and get rest of the process going as quickly as possible. Passage of GST amendment is an important landmark but only the beginning of a long journey.

Source : http://www.firstpost.com/business/gst-bill-on-wednesday-a-good-day-for-indian-economy-but-just-the-start-of-a-long-journey-2929238.html

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