A constitutional amendment to shift India’s fragmented indirect tax regime to a Goods and Services Tax (GST) is the most important legislation the winter session of Parliament will consider. Moody’s Investor Services has warned that lack of economic reforms will hit investment coming into India even as a raft of free trade pacts are being signed in its immediate neighbourhood, leading to great potential for trade and investment diversion. GST – which aims to dismantle inter-state fiscal barriers and create a common market within India – is essential to bolster revenues, boost India’s competitiveness and make it easier doing business in the country.
Fortunately, portents are good. Finance minister Arun Jaitley was upbeat after meeting with opposition leaders to drum up support for the bill. Congress is one of the principal obstacles now. But Jaitley did well to generously praise Congress-led governments’ contribution to earlier versions of GST legislation. Given its contribution to the process, Congress needs to revisit its insistence on introducing an explicit tax rate into the constitutional amendment which it hadn’t mooted earlier.
The entire GST legislative process has three tiers. The constitutional amendment is the first tier, which will be followed by a standalone GST law enacted by Parliament and state assemblies. Finally, subordinate legislation needs to be put in place. Therefore, in this scheme a constitution amendment bill needs to provide utmost flexibility. Specifics such as tax rate, which are influenced by context, should be a part of second and third tiers. In the interests of utmost flexibility, it is important to ensure the amendment does not limit the areas of economic activity which are subsumed under GST and thereby expand the benefits of a common market. At present, electricity and real estate fall outside the purview of GST. Both areas are integral to India’s international competitiveness in any kind of economic activity. Keeping them outside GST does not make economic sense.
Introducing an origin-based tax into GST is an unnecessary compromise. Separately, provisions on the decision making GST Council need improvement and a dispute resolution body proposed in an earlier version of the bill needs to be considered again. A constructive opposition can play a role in improving the quality of the current bill. Simultaneously, an open-minded government can pay heed to suggestions and unleash a reform which will have far-reaching impact.