Good Sense Triumphs: GST Through At Last!

Good Sense Triumphs: GST Through At Last!

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

In saying this, Jaitley emphasised the simplicity and efficiency of this one nation, one indirect tax architecture, being ushered in now.

The breakthrough was prior- enabled by extensive discussions to arrive at an informal consensus. The Congress, as the originators of the earlier versions of the Bill, starting more than 10 years ago, were, as expected, centre-stage.

And while a huge number of uncertainties, unclear meanings, and teething problems are clearly expected in the GST implementation, its desirability, and its potential to be transformative, was recognised by all.

And now that the constitutional amendment with changes has been passed, it will be harmonised with the previous version in the Lok Sabha from earlier this year, and passed again there; before being ratified by at least 15 out of the 29 states.

Then, the specific tax rates applicable, and final inclusions and exclusions, will be legislated around November-December 2016, prior to implementation, perhaps as early as   the 1^st April 2017.   

The tone of this historic Rajya Sabha debate was cooperative, if apprehensive, with many speakers anticipating revenue losses at first. This is new territory, even though GST legislation has been adopted in a number of countries already.

Former Finance Minister P Chidambaram admitted that indirect tax collections overtook direct taxes in 2006 - natural when it addresses under 1% of the population!

And though indirect taxes are considered ‘regressive’ in theory, because they fall with the same strength on the rich and poor alike, it is today what the Indian government lives on, both at the centre and in the states.

But, based on our immense population, this tax is projected to increase the GDP by up to 2% p.a., via much better IT-based compliance.

Chidambaram and most others plumped for no more than 18% as GST. He cited developed countries which charge 16.8% , and developing/emerging countries that charge an average of 14.1%. This even though it wasn’t capped in the constitutional amendment, after much prior wrangling.

Jaitley clarified that the states were currently realising revenues at 25-29% in toto, and were not willing to be capped at 18% .

Several members also demanded an equitable, ‘revenue neutral rate’ - meaning that a state should keep on taking in the same amount of indirect taxes, that is does at present. Paradoxically, Chidambaram and others also felt that rates higher than 18% would stoke inflation, even though current rates, are in effect higher!

Most of the Opposition wanted an assurance from this majority government,  that the nitty-gritty of the GST- namely the dividing of the spoils between the centre, (CGST),  the integrated GST(IGST), should not be rammed through as money bills. Jaitley refused to foreclose on future options, but said he would  strictly conform to constitutional provisions and the suggestions of the empowered committee that would draft the legislation. After some toing and froing the Congress agreed.

The AIADMK was the sole outright dissenter, saying that GST was unconstitutional and unfair to the states.

Some felt the centre had a tacit veto power on the detailed provisos, though Jaitley rejected the contention, clarifying that it was incumbent for both centre and states to work together.

Sitaram Yechury, true to form, warned the implementation of the GST  should not end up blatantly favouring the ‘dollar billionaires’, instead of the  90% of households who  earn less than Rs. 10,000/- per month . He also wanted not just a ‘revenue neutral rate’, but a ‘fair revenue rate’.

Yechury’s formula, echoed by some others, would put pressure on the fiscal deficit, as the centre might have to borrow more, to pay for huge shortfalls, if the revenue collections are set too low.

Some demonstrated their ambivalence to this unified tax by wanting freedom for states to impose additional levies, particularly on tobacco.

However, the success of the GST going forward, rests not so much on the  haggling and the complexities of the coming fine-print; but the demand push of a dynamic country of over 1.2 billion people. India will have an ever growing appetite for more goods and services for decades to come.

In the medium term, GST revenues will rise substantially, compounded by an economy growing in double digits, from the 7.5% now.

This, spurred on by a consumption-led virtuous cycle, with better industrial production, services, infrastructure building, and agricultural performance.

For: ABP Live

(748 words)

August 3^rd, 2016

Gautam Mukherjee