Hu Tu Tu on GST

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The unified taxation system has a flip side to it. Its implementation will initially give rise to inflation; lower consumer demand, affecting businesses, jobs and production activities, thereby hurting Narendra Modi’s 2019 re-election prospects

While Finance Minister Arun Jaitley and Prime Minister Narendra Modi are pulling out all stops to get the much wanted and awaited Goods and Service Tax (GST) Bill be passed in the Winter Session, Congress party looks adamant on lingering it for the next session so that the Modi Government fails to meet its deadline. PM Modi in his efforts to reach the key opposition, went ahead with inviting Congress president Sonia Gandhi and former Prime Minister Dr Manmohan Singh at 7 RCR to break ice and facilitate the GST see the light but all efforts seems to be in vain.

As we talked to various leaders of the grand old party, it seems that the old and young congressmen are divided on the approach for GST bill. The elders including Dr Manmohan Singh and Sonia Gandhi are willing to support the bill in Rajya Sabha even if the NDA government agrees to modify a few key changes in the legislation as recommended by the Congress party, however, the young brigade led by Rahul Gandhi is going for the tit-for-tat approach citing BJP did the same from 2011 to 2013 in regard to GST Bill. So, let’s give them the same pinch which BJP led opposition forced Congress to feel when there was UPA-2 government in the New Delhi.

Like Congress party even media seems split while debating how important it is to pass the bill by pressing upon its benefits. However, none of them could give the reason for Prime Minister Narendra Modi softens his image and asking Sonia Gandhi and Dr Manmohan Singh to break the parliamentary deadlock continuing since the Monsoon Session. Similarly, there is need to understand the reason for the Congress party taking such a risk of ‘obstructionist’ by stalling the GST Bill in the Council of States.

CHANGED CONGRESS DYNAMICS

Speaking on GST matter, a senior former Congress minister said, “I am for the bill, but the youth brigade and Mr (Rahul) Gandhi are firm that if BJP stalled it during our time, then Congress cannot make it a cakewalk for the BJP government now.”

The Sonia-PM meeting was not merely the first structured one between the two. It had more to it. We need to look at it as the PM putting behind him the bluster of having won an election and invited Sonia Gandhi, who on the other hand moved past the wounds of a stinging defeat in the national election last year to accept the invite. The two post poll psyches have been instrumental in creating ground for ugly combats between the two main parties derailing parliament since July 2014.

Past commitments matter less to the Gandhi scion and his group of young Congressmen. And helping PM Modi pass a landmark legislation and walk away looking good is a complete veto. The government’s retreat on the land acquisition bill and the BJP Bihar debacle has provided extra energy to this group.

The young turks are flagging the need for caution — that GST is perhaps the last big ‘must do’ legislation on NDA government’s list, as the land bill is more or less consigned to cold storage for now. Once the bill is passed, the government will not really need the Congress and the re-conciliatory tones will disappear.

‘The Congress-mukt or Congress-free Bharat’ agenda of the BJP is on hold for key reforms like the GST to be clinched. Once done, the BJP will press the aggression gear. The truce is very cosmetic and not for long-term,”said a young Congress MP.

On former Finance Minister P Chidambaram pressing for passage of the GST bill, another Congressman said, “He (Chidambaram) may be for the bill but is not for making it easy for the government. The BJP frustrated his attempts to pass bills for years. There is no harm in the BJP squirming for some time.”

SOFTENING MODI

The government is aware of what’s happening within the Congress but there is little it can do. It chose a Sonia-Modi meet instead of a Rahul-Modi meet. While concluding the debate on BR Ambedkar’s role in drafting the Indian Constitution in the council of states, PM Modi was conciliatory. He praised Jawaharlal Nehru citing, “We have to look for reasons for uniting people…keep promoting unity and harmony.”

On the face of it, the main opposition party and the government are going through the motions to keep the hope of passing GST alive. Over the last 10 days the government has indicated that it is not averse to Congress first demand — to drop the 1 percent additional origin tax proposed to help manufacturing states make up the losses they may incur due to GST, which is a destination tax.

To tackle demand two — putting a cap on GST — a committee headed by the government’s chief economic advisor Arvind Subramanian has suggested a two rate structure for the GST. The committee has recommended a standard GST rate of 17-18 percent around an revenue-neutral rate (RNR) of 15-15.5 percent. There are three other rates – 12 percent for some goods, 40 percent for ‘sin’ goods and 2-6 percent for precious metals. The panel has reasoned that under an RNR of 15-15.5 percent, with a lower rate of 12 percent and standard rate of 18 percent, the impact on inflation would be negligible. If the standard rate were to rise to 22 percent, the impact would be 0.3-0.7 percent on aggregate inflation.

Sources in the finance ministry say many working models are under scrutiny for a GST rate which is the lowest possible to arrive at a revenue neutral situation — which means ensuring that the new tax fetches the same amount of revenue as all the older taxes being subsumed into GST, were bringing.

THE ECONOMICS

The GST Bill is being touted as the bhramastra for the Indian economy, especially the consumer oriented states like Bihar, Jharkhand, Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Rajasthan et al. where industry is not the main source of state GDP. Once implemented, GST would help contain inflation in these states and fiscal deficit.

Adi Godrej, Chairman of Godrej Group said, “Once GST is introduced, there should be a reduction in taxes on consumer products by around 5 percentage points. As consumer prices get lower, it will further contain inflation.” According to a study by the National Council of Applied Economic Research (NCAER), full implementation of the GST could expand India’s GDP growth by 0.9-1.7 percentage points. GST reform has been lauded by the World Bank, International Monetary Fund and the Fitch Ratings Agency.

If GST is so important why both Congress and the BJP is stalling while in opposition but tried to implement when in ruling coalition at New Delhi? The reason is quite simple. A simple look at the time of GST Bill introduction suggests that all central governments (including current one) wanted to implement the legislation it in the early part of their regime while the opposition wanted to get the bill passed and implemented in the later or middle of their tenure.

Reason for this complexity is not political. It is the economic experience with majority of the countries that implemented GST Bill. There are loads of positives in GST, yet there is an inherent drawback that haunts GST. In the short-term i.e. the initial two to three years — GST would trigger inflation. Everything from groceries to entertainment would become expensive by 5 percent to 8 percent (assuming GST is at 18-22 percent). Why to go too far. Malaysia implemented GST from April 1, 2015 and has seen a huge jump of around 2.5 percent in inflation.

So if the Congress manages to stall GST until 2017, there would be a spike in inflation till 2019. And the Congress could easily blame the BJP for the inflation and hope to score politically in the 2019 elections. After all it would be tough task for BJP or any other ruling party to explain to the voters that the inflation is a result of GST and not mismanagement. Not just that, if by a miracle, Congress manages to pull this off and form a government in 2019; even if it does not do much, the growth would start (of course ceteris paribus) by 2020.

It is obvious that evading taxes would become difficult once the GST Bill is implemented. Under the GST legislation, manufacturers or those providing services (consultants, CAs etc) can also pass on all costs to customers (as all indirect taxes could be charged) including simplest costs like furniture bought or electricity bill. This would make the cost of the goods and services increase. This could lead to increase in costs. Not just that, for the whole tax system to move from one form to another takes time. Companies have to calculate their costs differently, manage their warehouses differently among other things. This takes time and creates chaos.

Taking cue from the Malaysia, the country is witnessing slowdown in its economy as demand and production have also gone down in the country. Although the government claims that the GST would not hurt businesses due to GST claimable practice, in fact it will hurt the businesses too. This is because of the low demand in the market due to the high input cost of product passed on to the end consumers, the businesses have to decrease the supply to meet the current condition of lower demand, thus the businesses have to cut down the expenses such as labour cost due to the lower output needed and eventually there might occur high rate of unemployment. Besides, the business is not producing in the efficient conditions as they are not maximising the usage of the machines, rental and etc and all these will lead them to downsize their businesses and eventually lead to the recessions in a country.

Liew Chin Tong, a Malaysian lawmaker says, “Imposing GST on a relatively poor population, when domestic consumption is the main driver of growth, is a sure way to recession.” He pointed out that the people below poverty line would be forced to pay taxes and hence leading to recession.

AUSTRALIAN LESSON

It looks that young turks of the Congress party led by Rahul Gandhi have done their home work quite well by going through the political developments that took place after the GST Bill was implemented in other countries. It would be astonishing to know that all the governments except former Australian Prime Minister John Howard, none of the government could take advantage of the GST Bill implementation. The respective governments failed to repeat what John Howard could because they implemented GST in later part of their regime while the former Australian Prime Minister implemented in the early phase of his tenure in office. So, he was able to pass through the side effects of the GST in early two years as the good results of the legislation was reaching out to the voters in plenty when voting bells rang in Australia. Howard was able to win two successive elections after the GST Bill became legislation down under.

Therefore, both ruling and the opposition parties are under pressure. Once it fails to meet the deadline, BJP would try to put the bill into the cold storage as it cannot afford to bear the brunt of GST side-effects in 2019 elections. Similarly, Congress does not want to endanger the future of its Gandhi scion by allowing the GST Bill becoming legislation by April 1, 2016 and allow Narendra Modi to take political mileage of this bhramastra in 2019 elections.

Feedback on:[email protected]                                       By Asit Manohar

Above article was first published at : http://www.dayafterindia.com/detail.php?headline=content&catid=8529

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