On Thursday, it was heartening to see both the BJP and Congress leadership joining hands in Parliament to push one of India’s biggest reform items a step closer to reality — the Goods and Services Tax (GST) Bill. “This Bill, I have no hesitation in conceding, is a collective property,” Union Finance Minister Arun Jaitley said after sharing the success of the landmark move with Congress leader, Manmohan Singh, who facilitated the move by asking Jairam Ramesh not to press for his amendments.
The global perception on India’s slow-paced progress on big ticket reforms, something that has been cited often by rating agencies and multilateral agencies as a big turn off in India growth story, is set to change to a considerable extent with the GST becoming a reality.
The passage of four supporting legislations in Rajya Sabha on Thursday is a good sign and somewhat breaks the big ticket reform jinx for the Narendra Modi-government, which has already made notable progress on several other incremental reform steps such as subsidy rationalisation, bankruptcy code, Aadhaar and ease of doing business.
Without doubt, the GST will be seen as a landmark economic reform the country has witnessed in several decades and something that sets the stage to take the economy to a higher growth orbit.
With the Parliament clearing four crucial supporting legislations — The Central GST Bill, 2017; The Integrated GST Bill, 2017; The GST (Compensation to States) Bill, 2017; and The Union Territory GST Bill, 2017 -— GST is one more step closer to reality.
Following this, the state governments will have to separately pass the State GST Bill. Also, the tax infrastructure needs to be prepared to usher in the new regime that will subsume several state-level levies and strive to create a single market.
As this writer pointed out in an earlier piece, in reality, the GST will be far from a ‘one nation, one tax’ rate given that there are multiple tax slabs — beginning with zero rate, 5 percent, 12 percent, 18 percent and 28 percent. Above this, there will be additional cess and levies to be imposed on sin goods (such as tobacco products) and luxury items. On top of this, there will be additional levies.The rationale behind this is that this money will be needed to compensate the losses of the states against their projected revenues in the initial five years of the GST regime.
According to tax experts, the compliance process for companies will not be as simple as it is hyped. Under the GST regime, a company operating pan-India will have to go for multiple registrations in different states, meaning that compliance issues will continue. But, it is better to have a slightly flawed GST than absolutely no progress. Similarly, rolling out the GST on 1 July will be a tall order for the Modi-government as there are concerns with respect to classification of products into different tax slabs and preparedness of the tax infrastructure that should integrate the entire process at a central level. A September rollout would give more time for the government, tax department and industry to get ready for the big change.
GST is only one part of the whole reform task. The Modi-government, which is completing third year of its term, has very little time left to pursue the remaining items on its big-ticket reform list, mainly land and labour reforms. This should be accompanied by banking sector reforms such as privatization of state-run banks and bad loan resolution.
Land and labour reforms are two highly political sensitive areas but important for the economy. Making land available to industries, especially foreigners who want to set up factories in India, is key to Modi’s Make in India plan as well.
If both BJP and the Congress can carry forward the consensus built on GST with state governments to achieve other reform targets, this will be a win-win for this government and the economy.
In a recent report, international rating agency, Moody’s had said (read the report here ) that BJP gaining presence in states will give more firepower to the Modi-government to proceed with other reform-items. Subsequently, the central government and the new BJP-led states may have improved collaboration, partially circumventing impediments to reform at the federal level on politically sensitive issues like land and labour reforms, the report said.
Even without using its political muscle, a consensus path could be the way forward for the BJP-government to proceed on the reforms-path. The question is, can both Manmohan Singh and Jaitley take the lead to take constructive politics ahead to finish the remaining items on the list to give wings to an aspiring economy.