Why Congress is wrong on GST

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The Congress’ demand for an 18 per cent rate for the goods and services tax (GST) is justified. What isn’t is that it be included in the Constitutional Amendment Bill. A low GST rate is essential for the acceptance of this new levy that will significantly benefit the economy but may pinch the consumer when first imposed.

The tax on services will rise sharply from the current 14.5 per cent, including the recently imposed Swachh Bharat cess, to the GST rate. And while lower effective tax on the goods compared to over 25 per cent now should make up for this higher incidence of tax on services, that trade-off will depend on if the industry passes on the benefit of lower tax on goods to the consumers.

The government is in no position to ensure that this benefit is passed on. So, a starting low GST rate of 18 per cent is reasonable and one that the government should have no problem accepting. The same cannot be said for the demand that this be built into the Constitutional Amendment Bill, presumably to protect the consumer and industry against arbitrary increases in levy states at free will, like what happened in value-added tax (VAT) regime.

India has been through the frustrating experience of raising the FDI limit in case of insurance where the threshold is prescribed in the law. The Congress should know the pitfalls only too well. When UPA 1 came to power in 2004, the then-finance minister PChidambaram had proposed to raise FDI limit in the sector to 49 per cent from 26 per cent. He could not manage it then, or during UPA 2’s regime because the limit was built into the law, and the law couldn’t be changed for welldocumented reasons.

It took more than a decade to change that limit while that crucial sector was in desperate need for funds and insurance penetration remained abysmally low. It is only now that the first few deals raising foreign stakes in insurance to 49 per cent are beginning to come through.

Does the Congress wish the same rigidity in the GST law? Raising the GST rate through a constitutional amendment that requires a two-thirds majority and further approval from the states will be enormously more difficult than the seemingly easier higher FDI limit in insurance.

How will the government respond to situations where it may need to raise the rates? What if during the working of the law, it is found that the 18 per cent rate is too low and the entire finances of the government come under strain? Besides, the VAT experience has shown that states are now also aware that differential rates do not work.

The Congress itself did not think of such a cap in the law when it was in the driving seat. The party has, in fact, repeatedly said it wants a good GST law. Then why is it insisting on this constitutional cap?

For sure, it is going to make things difficult for the government as states are not likely to agree to the limit because it will impinge on their constitutional right to tax. The objections on a1 per cent levy on supply of goods or interstate sales are, however, justified. The government would do well to accept that suggestion.

To be fair, the government itself has been pushed into having the levy reach a consensus with the states, namely, the manufacturing ones like Gujarat, Maharashtra and Tamil Nadu, that fear loss of revenue in the regime tilted in favour of consuming states.

That apprehension can be addressed though a strong compensation clause making it clear that states will be compensated for any loss of income for a period of five years.

The simple question that the Congress needs to ask itself is what kind of GST law it would have passed had it been in power. Or what kind of law would it want to inherit if it were to return to power. The answer to that is unlikely to be a law that has such rigidity built into the statute.

It’s time to take one step forward. Shortcomings — and there will be many — can be addressed as we go along. For that, we need a flexible law.

Source: http://blogs.economictimes.indiatimes.com/EcoView/why-congress-is-wrong-on-gst/

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