JOIN USOn August 3, 2016, Rajya Sabha (RS) passed the 122nd constitution amendment bill (already cleared by Lok Sabha last year) paving the way for the Goods and Services Tax (GST). This is a ‘transformative’ reform that will convert the Indian Union of 29 states in to a seamless national market enabling free movement of goods and services as a single uniform tax replaces a plethora of existing taxes.
Promising multiple benefits for producers, exporters, businesses, consumers and governments via increasing efficiency in supply chain, reducing transaction cost, improving ease of doing business, tax buoyancy and stemming evasion and black money, GST will lay the foundation for putting India on double digit growth trajectory in the next couple of decades.
To accommodate concerns raised by opposition parties and acting in a spirit of bipartisanship, the government brought in amendments to the bill as approved by the Lok Sabha. These address inter alia, two contentious issues flagged by the Congress. Team Narendra Modi has removed the additional 1% tax on supply of goods and services during course of inter-state trade.
This being an origin-based tax, was completely out of sync with GST which is a destination-based tax. As finance minister, Arun Jaitley clarified during his reply in RS that he was aware of the anomaly but had to assuage the concerns of manufacturing states – Maharashtra, Tamil Nadu, Gujarat and Karnataka which needed protection for some time.
Still, the additional tax was unwarranted as the bill had already provided for compensation to states for loss of revenue at 100% in the first three years, 75% in fourth year and 50% in fifth. It is good that the wrong has been corrected even as government has further sweetened the package by promising 100% comp-ensation for all five years. A provision for this has been incorporated in the main Act to set at rest any doubt whatsoever.
Second, it has explicitly provided for a ‘dispute settlement mechanism’ under the scheme of GST Council (GST-C) to adjudicate disputes (between centre and states and amongst states) arising from its recommendations. Though, a bit short of the Congress demand for an independent authority, this should give desired comfort.
The most sticky was its demand was for ‘ring-fencing’ of GST rate. It had asked for mentioning a cap at 18% (revenue neutral rate or RNR, determined by a committee under Chief Economic Adviser Arvind Subramanian) in the constitution amendment bill itself. This would have led to an abhorrent scenario.
As and when an increase in GST rate is needed, the government would have to go for constitution amendment which requires passage by 2/3rd majority in both LS and RS followed by ratification by at least 15 state assemblies. Considering fractious RS, approval may not come and even if it does, it would be too late defeating the purpose.
There has to be enough flexibility in the system so that revisions in the rate can be effected in time to ensure that development activities are not hamstrung for want of resources and governments are adequately equipped to deal with contingencies. Therefore, the bill has rightly entrusted this function to the GST Council (GST-C) which can respond to such situations in a timely manner.
Softening its stance somewhat, Congress now wants the ceiling to be mentioned in the supporting bills – Central GST (C-GST), Integrated GST (I-GST) and State-GST (S-GST) which need to be passed by both the Centre and states to operationalise the GST. Pertinently, Jaitley has given an assurance in this regard. But, this too is not without grave problems.
When required, each of the 29 state assemblies will have to approve amendment besides the parliament doing it with respect to C-GST and I-GST. Getting all these through will lead to inordinate delays thus defeating the objective. And, what if some states (or even one) decide not to go along? Alternatively, for states to authorise the Centre to give effect to increase in S-GST cap (vide parliament’s approval) will tantamount to surrendering their right and hence, untenable.
Ceiling rate
Congress MPs have been harping on decisions to be taken by parliament/ state legislature (instead of the executive). After GST-C recommends the rate, Centre/states will still get it approved by respective Houses. But mentioning a ceiling rate in C-GST/I-GST/S-GST Acts is a different ball game altogether. With this, even when GST-C wants a higher rate, this won’t be possible until all these Acts are amended to increase the ceiling.
Clearly, mentioning the cap in supporting legislations is no less a defective architecture (to bank on phraseology used by Jaitley while rejecting original proposal of Congress) than an act of incorporating it in the constitution amendment bill.
The demand for “ring-fencing” shows lack of trust in the mechanism of GST-C. The Council is a body created by constitution amendment. It includes finance ministers of Centre and states and its decisions have to be approved by 3/4th majority with 2/3rd share of states and 1/3rd of the Centre. It would be naïve to surmise that it will act in a manner detrimental to the interests of consumers, industry, businesses and economy at large.
Therefore, parties must not insist on impregnating a ceiling even in subordinate legislations as that will take away the much needed flexibility to respond to unfolding situations. Having lived with effective tax incidence of 30% plus, it looks utopian to straight away go to 18% and that too by casting it in stone. Even if we land in say 20-25% zone, that would be a gain over where we are today.
The success of this momentous reform will depend on how well the GST-C executes the task assigned to it as also on effective implementation of its decisions. The Centre and states must not do anything that infringes on the ‘pooled sovereignty’ devolved on it by the constitution amendment.
(The writer is a New Delhi-based policy analyst)