Sitting in the comfortable confines of the Swiss Alps, Union Finance Minister Arun Jaitley said on Saturday that his government is confident of pushing GDP growth higher and continuing the reforms agenda. Improving the “ease of doing business” in India and passing key legislation on that front has been on top of the NDA government’s agenda ever since it took office. Jaitley also said the political opposition is unlikely to obstruct the reform process, including the direct and indirect tax reforms, and he was hopeful about the goods and services tax bill getting through as well, which is one of the few reforms that has been held up. One of the key impediments to the implementation of the GST has been the opposition of the Congress, which holds significant numbers in the Rajya Sabha. Speaking at Davos, senior Congress leader Kamal Nath said that the party has signaled its willingness to be flexible on its demand to cap the GST rate in the proposed bill. To the uninitiated, the Congress party remains steadfast in its demand for three changes in the current GST bill. The party has demanded that the 1 percent additional levy on the supply of goods and services should be scrapped. It also sought an independent dispute resolution mechanism for settling disputes between states, besides capping the tax rate at 18 percent in the bill. To the last point, Jaitley argued that including a cap on the tax rate would require an amendment to the law every time the tariff needs to be revised.
“No tariff can be perpetual. If volumes increase, it can go down. In a crisis, it can go up. None of your Finance Ministers (Pranab Mukherjee and P Chidambaram) proposed it. How can we go every time to the states if we want interest rates to be raised,” he said. Suffice to say, Jaitley is right when he describes the Congress’ proposal to enshrine a cap on the GST in the Constitution as preposterous. Governments must also always strive to maximise the tax/GDP ratio so that States have enough money to invest in assets that will beget more taxes. In other words, tax levels must never be capped. Therefore, the Congress party’s insistence on a GST cap to be enshrined in the Constitution is out of sync with reality. However, the irony could not be starker since the BJP had held similar obstructionist positions against the GST Bill when it was in opposition. The roles have been truly reversed. Back in the Winter Session of Parliament which concluded in December, the government was keen to get the Bill passed. But the Congress-led Opposition forced repeated adjournments in both Houses over various matters, including the National Herald case and the cap on GST.
In its essence, the Bill seeks to introduce a simple tax regime, which would require subsuming all state and central taxes under GST. The one thing that’s been keeping companies small is that moving into another state is a tremendous expense. Besides following an entirely different set of regulations, companies also follow a completely different set of taxes. If the tax is properly implemented, it can change all that, and replace all this confusion with a simple, common tax rate that’s easy to pay. It was the previous UPA government, which first introduced the Bill to Parliament, only to be opposed by the likes of Narendra Modi, who was then the Chief Minister of Gujarat. Suffice to say, the previous UPA government could not acquire the necessary political capital to the pass the Bill. After making his way to the Centre, however, Prime Minister Modi brought back the GST Bill with certain significant changes. One of the changes that the Congress has remained steadfast against is the additional, non-creditable tax of 1 percent on the inter-state movement of goods. This tax on inter-state commerce directly contradicts everything the GST stands for. This means that inter-state trade will not be seamless as Arun Jaitley has promised and compliance difficulties will translate into long lines at the state borders. Tax reform is a tricky process. Even if the Centre does manage to incorporate certain changes, experts have argued that the chances of the indirect tax reform kicking in by the next fiscal are slim. In addition to the GST Bill, three other pieces of legislation need to be passed by Parliament. The road ahead is indeed long and hard.