At Last, One Nation, One Indirect Tax Regime!

At Last, One Nation, One Indirect Tax Regime!

Finance Minister Arun Jaitley launched the seven hour long debate on the GST in the Rajya Sabha on August 3^rd, by characterising it as the most significant tax reform ever in the history of India.

In this, Jaitley went beyond the marker of 1991, the year of the last big sets of reform, to make his point.

The breakthrough towards the debate and successful two-thirds voting thereafter, was enabled by extensive discussions between the government and various other political parties, including the Congress, who were the original authors of the GST Bill.

Four amendments to the form of the bill earlier passed by the Lok Sabha were put on the table. And it came after unanimous support from the state finance ministers a few days ago.

While a huge number of teething problems are expected, the consensus on its desirability, and its likelihood to be transformative over decades to come, was clearly on every parliamentarian’s mind.

And now that the constitutional amendment has been passed by the Rajya Sabha, it will be harmonised with the earlier version in the Lok Sabha and passed afresh, before going to be ratified by at least 15 out of the 29 states of the Indian Union, and each with a two thirds vote in their respective assemblies too.

Then the specific tax rates applicable, the exclusions and exclusions, the grievance redressal procedure, etc. will be legislated, based on the draft  prepared by the empowered committee, which has Congress, BJP and members from other parties in it.

This is expected to happen by November-December this year  and the GST roll-out is targeted for the new financial year in April 2017.

The tone of the Rajya Sabha debate fortunately, was cooperative, on both sides of the aisle, if apprehensive. This is new territory for India, even though GST legislation has been adopted in a number of countries around the world.

Former Finance Minister P Chidambaram spoke of two things in particular .He  tellingly admitted that indirect tax collections overtook direct taxes in 2006, which targets under 1% of the population. And this, despite a propensity towards ‘creeping taxation’, for almost all previous governments .

Even though indirect taxes are considered ‘regressive’ in theory, for falling with the same strength on the rich and poor alike, it is today what the Indian government, at centre and state alike, lives and breathes on.

But, based on our immense population, it is this universal single tax, that has the greatest potential to increase the GDP, via much better IT- based compliance, by up to 2% in due course.

Chidambaram reiterated the Congress position, passionately plumping for no more than 18% ,  citing developed countries which charge 16.8% ,and developing/emerging countries that charge an average of 14.1%.The fact that it is not being capped in the constitutional amendment, notwithstanding, after much prior negotiation.  

However, Jaitley countered by telling the house that the states were taking in between 25-29% via the cascading taxes presently, and were not willing to be capped at 18%.

Chidambaram nevertheless spoke of arriving at an equitable ‘revenue neutral rate’, meaning that a state should keep on taking in the same amount of indirect taxes in toto, that is does at present, even after the implementation of GST.

He also wanted an assurance from Arun Jaitley, that the nitty gritty of the GST- namely the dividing of the spoils between the centre, (CGST), and the states(IGST), should not be rammed through as money bills with this government’s brute majority, but be debated and passed as regular financial legislation in both the houses of parliament.

Jaitley refused to pre-empt what the empowered committee would come up with, and only assured the house that he would adhere to constitutional provisions, and the advice of the committee, as applicable. After some back and forth, the Congress finally agreed when it was made clear that the draft legislation would be extensively discussed.

Many speakers agreed with  Chidambaram, except for the AIADMK member, who said that GST was unconstitutional and unfair to the states. He also said that Tamil Nadu stood to lose revenue to the tune of over Rs. 9,270 crores per annum, and this would have to be made up by the centre going forward, not just for five years as intended, but in perpetuity.

But all the speakers wanted the GST to be both sensitive in terms of its rate, favouring the interests of the poor. Some pointed out its propensity to stoke inflation, if rates were pegged too high, little realising perhaps that they were cumulatively much higher right now!

Many felt the centre had a veto power on the detailed provisos, given its  majority strength in this government, and wanted the centre to have 25% weightage, and the states to have 75%  and a passing vote to also need 75% and not a simple majority!

Jaitley countered this too, by saying there was no option but for the centre and states to compromise, as they had a mutual veto.

Sitaram Yechury, true to his Communist principles, averred that the implementation of the GST  should not end up blatantly favouring the ‘dollar billionaires’, instead of the  90% of the people who  earn less than Rs. 10,000/- per month per household,  according to the 2011 census. He also went beyond the prevalent wisdom of the house, to suggest not just a ‘revenue neutral rate’ of  GST but a ‘fair revenue rate’.

Of course, this implies shortfalls might have to be borne by the centre for much longer than the initial five years intended.

The NCP and the TMC pointed out that the political parties other than the Congress and the BJP, seem to have been taken for granted, with both holding up the bill, between them, for more than ten years.

 After all was said and done, there was a visible confusion between preserving state revenues, with calls for freedom for states to impose additional taxes to make up shortfalls, and a plea to keep taxes down for the poor.

However, both concerns are likely to be addressed, not so much by the fine print in the GST legislation to come, but the demands of a dynamic country of over 1.2 billion people, with an ever growing appetite for both goods and services.

In the short term it could put some pressure on the fiscal deficit as the centre borrows more to meet its obligations to the states. But this will be offset by an economy growing in double digits in the medium term, spurred on by broad-based improvement in industry, services, infrastructure, agriculture and employment.

For: The Pioneer

(1,097 words)

August 3^rd, 2016

Gautam Mukherjee