Bihar chief minister Nitish Kumar is a shrewd politician. He has dumped the JD(U)’s electoral ally, the Congress, on the Goods and Services Tax (GST) Bill. He opposes the constitutional cap sought by the Congress even as he seeks its speedy roll-out.
Why has he done that? Because he knows that GST will be a big equaliser going ahead, giving laggard states an opportunity to catch up with the more developed and industrialised ones.
Other Opposition-ruled states like Orissa, West Bengal and Uttar Pradesh will do well to raise the pressure on Congress and get the GST Bill passed in the current monsoon session of Parliament.
The current complex indirect tax structure, which the GST will replace, is heavily loaded in favour of industrialised states, allowing them to corner most of the new investment, foreign and domestic.
Take the 2% central sales tax (CST) on inter-state sales of goods. This tax means that goods that are produced within the boundary of a state will face lower taxes, as opposed to those made by sourcing inputs from all over the country. And the more state boundaries crossed in the production process, the higher the incidence of these taxes.
This has encouraged the entire supply and input system for manufacture of a particular good to stay within the boundaries of the state where an industry has come up. So the state that has a headstart in a particular industry, hogs the entire opportunity.
This also diminishes the chances of other less developed states attracting fresh investment, as investment tends to gravitate to the already developed states other things being equal.
The CST is just one of the inter-state taxes. Entry tax and octroi not only add to taxes but also make logistics and transport slow and costly, again creating an incentive in favour of developed states.
From a broader national perspective, these inter-state taxes also lead to the fragmentation of industry, discouraging scale where there are cost opportunities and encouraging multiple locations to avoid the hassles and costs of too much inter-state movement of inputs or intermediates.
In India, the bulk of commercial transport is on trucks that have to crawl through over 600 inter-state checkpoints, slowing down cargo and adding to costs, again discouraging nationwide supply-chain-based manufacturing. When GST creates a single national market that’s not balkanised by myriad local levies, production of goods and services will take place in locations where they can be produced the cheapest, allowing them to then be traded seamlessly across borders.
States such as Jharkhand and Chhattisgarh that are working hard to improve their ‘ease of doing business’ will then be able to attract more investment on the strength of their resources and what they offer to industry.
By the same logic, most of these states will also do well to oppose the 1% inter-state levy proposed by the government under GST to compensate the manufacturing states that fear a loss of revenue once the regime is rolled out.
They will also do well to oppose the Congress demand that that there be any sort of cap on the GST rates in the Constitution, or the GST law that can make changing rates cumbersome.
Ideally, the GST rate should be like that in the case of excise and Customs. Ahigh rate is prescribed in the law that allows the government to make changes through notifications within that limit.
Similarly, in the case of GST, a sufficiently high tax rate could be specified in the law while giving the proposed GST councils powers to change the rate through a consensus.
These states are also among the most populous ones of the country, which will anyway stand to gain from GST, a consumption tax.
This is also the best chance for the GST Bill because two of the biggest industrialised states that stand to lose under it, Gujarat and Maharashtra, are ruled by the BJP. Gujarat has in the past opposed the reform strongly. The BJP government at the Centre that is trying to push the GST through can get these states to fall in line.
West Bengal’s Mamata Banerjee, UP’s Akhilesh Yadav and Orissa’s Naveen Patnaik should adopt GST and get it passed this session. Most of them have already supported the reform.
But it is time they come out and force the issue so that the law is passed and the reform is rolled out from April 1, 2017. Instead of being passive spectators of the tedious shadow-boxing between the BJP and the Congress.