First, a quick history. Back in 2006, the people of India were informed about the Government’s intention to introduce the Goods and Services Tax (GST). Eventually, it was decided that India would adopt the Dual GST Model where the tax would have two components – a Central GST (CGST) and a State GST (SGST) to be levied and collected, concurrently, by the Centre and the States respectively. Since the existing provisions of the Constitution do not authorize such joint levy by the Centre and the States, it became necessary to amend the Constitution. But from its very conception, endless negotiations between the Centre and the States continued on different aspects, and the 115th Constitution Amendment Bill introduced by the UPA Government in April 2011 remained only in paper.
Negotiations resumed after the NDA government took over. But the states continued to demand the following: the exclusion of petroleum and petroleum products, alcohol and entry tax from the ambit of GST; fiscal autonomy via the power to vary the State GST rate within a narrow band; and a constitutional provision for compensation to the states for the loss of revenue they would incur after the introduction of GST.
As an agreement looked elusive, the Union Finance Minister, Arun Jaitley broke the stalemate by making certain compromises and delivered the present 122nd Amendment Bill. He also fixed April, 2016 as the target date for the implementation of GST. After being cleared by the Lok Sabha, the Bill has been referred to a Select Committee of the Rajya Sabha.
Now, a few words about the Bill. It proposes to empower both the Parliament and the State Legislatures to levy and collect GST. The Bill provides for certain existing Central and State indirect taxes to be combined into one tax i.e. GST. The taxes to be thus subsumed would include Central Excise Duty, Service Tax, State VAT and a host of other State taxes like Entry Tax, Luxury Tax etc. Being a destination-based tax, the Bill requires that the State’s share of SGST accrues to the destination state when the goods move from one state to another. The Bill also provides for the creation of a GST Council comprising State Finance Ministers that would be chaired by the Union Finance Minister. It has been proposed that the GST Council will be making recommendations to Parliament and State Legislatures on issues that will include GST Laws, GST rates and resolution of disputes between Centre and the States.
Next, the issues in dispute. The Finance Minister has sorted out the issue relating to inclusion of Petroleum in a smart way. He defined GST in the bill as “any tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption.” So, Jaitley has excluded Alcohol from the ambit of GST, constitutionally, but not Petroleum & Petroleum Products, and Entry Tax. However, in order to please the States, he left it to the GST Council to decide on the date from which the GST rate would be applicable on Petroleum and Petroleum Products. Thus, effectively Petroleum and its products will remain outside GST. The GST would provide a continuous chain of input tax credit from the production end to the consumption end. Tax paid at each point of supply of the goods will be set off by the credit given at the next stage, thus eliminating the cascading of taxes. Therefore, the exclusion of these items will not only erode the tax base, but will also knock them out of the GST credit chain. Constitutionally, Jaitley has kept Petroleum within GST, and therefore no further amendment of the Constitution will be needed to bring it within the purview of GST in future. Alcohol and tobacco are internationally known as ‘demerit goods’ or ‘sin goods’. Tobacco and Cigarettes will remain within GST, and in order to maintain the present level of taxes, additional excise duty and State VAT will be levied on Tobacco items. Alcohol should also be brought within the GST, and given similar treatment.
Now, let’s come to the sore point for trade and industry. Some predominantly’manufacturing’ or origin states were resentful that in the GST regime, they would be losing the states’ share of GST to the ‘consumption’ or destination States with the interstate movement of goods. Therefore, to please them, the Bill has proposed the imposition of an additional one percent tax on all interstate movement of goods and services. This tax will be collected and kept by the manufacturing or origin States. This is against a basic principle of GST: that a state’s share of GST should accrue to the destination States. Under the current Bill, the input tax credit of one percent will not be available, and therefore, with each interstate movement, there will be a cascading of taxes leading to inflation. Moreover, at each State border there will be inevitable compliance costs- both visible and invisible. Thus,the Bill will undermine the growth of a common economic market, one of the GST’s major objectives. This compensating of the manufacturing states is especially unnecessary since in any case the Bill envisages compensation by the Centre for the States in case of revenue loss.
Just about ten months are left for the implementation of GST. The GST Net, the IT hub that will provide a common portal for taxpayers and taxmen to interact will have to be operationalised well before April 2016. Further, before embarking upon a reform of this magnitude, the Government must release all important draft documents relating to GST laws, rules and procedures in the public domain, and get feedback from all stakeholders. They would know best where the shoe pinches. The government will have to inspire the taxpayers and earn their trust to make the GST reform successful.
There is criticism today that the proposed model of GST is fractured due to the compromises. But the bitter truth is that compromises often become necessary in federal democracies, and the compulsions of democracy often lead to incremental and not ‘game-changing’ reforms. The Dual GST model will be like a joint venture between Centre and the ’29+’ States. In order to make this joint venture successful, one has to take all the States on board, with the compromises this entails.
How will the GST, in the proposed format, benefit us? Firstly, the prices of goods should decrease. There are two reasons for this. One is that by doing away with the multiplicity of taxes, the number of collection points, and hence the multiple points of contact between the taxpayer and taxman, will come down. This will reduce compliance cost for taxpayers – both visible and invisible. Secondly, by subsuming different taxes, the GST rate will definitely be much less than what a consumer pays today individually because of all these separate taxes. Such a reduction of cost will leave more money in the hands of the investors who would then invest more, leading to more employment and growth of GDP. Thirdly, by breaking the barriers of Entry Tax and different VAT rates of different States, the GST will ensure free interstate movement of goods and services – paving the path for a genuine common economic market for the entire country.
The big picture that we get from the above? That it’s time to move forward with an ‘imperfect GST’. One should keep in mind, in this context, that a perfect and ideal GST has never been practiced in any federal democracy.
However, one must thrive to see that the all powerful GST Council makes course corrections at the earliest opportunity, and gives us a better GST in the near future.
Sumit Dutt Majumder is a GST and Customs Expert, Author of the book “GST in India – its travails, tribulations and challenges ahead” and former Chairman Central Board of Excise and Customs (CBEC).