Demonetisation may have spoiled GST party

Almost no one in the country has been left untouched by the after effects of demonetisation of high-value currency announced on November 8. One of the major fallouts of the note ban move appears to be the Narendra Modi government’s ambitious Goods and Services Tax(GST).  The GST is, in all probability, going to miss the April 1, 2017 deadline.

Not very, long ago what seemed to be almost a done deal, is slowly slipping out of hands. A low hanging fruit looks no more reachable. The GST has all but missed its date with the winter session of Parliament that was advanced by a week for the passage of three supporting laws necessary for its rollout. Now, it is staring at the possibility of April 2017 implementation deadline being officially debunked.

The all-powerful GST Council, which sat on the weekend to sort out the vexed “dual control” issue, cut short the meeting halfway. The two-day meeting concluded on the first day itself for want of consensus between the Centre and the states. It ended the meeting without even discussing ‘cross- empowerment’ or dual control.

At the end of the meeting, Finance Minister Arun Jaitley held a customary press conference but he did not have much to offer beyond a next set of dates to deliberate on the sticky issues.

The Council is now faced with even bigger question ahead of its next meeting on December 22-23. What will be the compensation that the Centre may offer to the states for suffering losses due to demonetisation? This is completely a new set of worry among the states. It has changed their priorities and relegated the GST to back burner.

First it was West Bengal, which vehemently opposed demonetisation and made a U-turn on the GST. Then other states like Kerala, Tamil Nadu, Uttar Pradesh and Uttarakhand followed suit. Now, the latest one to join the bandwagon is Telangana.
The newest among the states has estimated its revenue losses to be to the tune of Rs 10,000 crore in the period between December and March. According to the state government sources, the income from stamp duty, excise and others have come down a whopping 70%.

Among others, West Bengal fears a revenue loss of 25% this fiscal. Besides, there are reports of some mills including a jute mill closing down in the state leading to job losses. Cash crunch has led to plunging of prices of perishable commodities.

For Kerala, the losses to the exchequer has already exceeded Rs 2,000 crore. These states are of the opinion that GST will be an added burden for them in the wake of demonetisation destroying businesses.

What went wrong all of a sudden to an almost agreed deal on the world's biggest tax reform? Did the Centre err somewhere in weighing the long-term consequences of demonetisation?

Did it hasten the move ahead of the upcoming Assembly elections eager to cut down on the use of money power? Or, whether Prime Minister Narendra Modi, facing flak from all corners for the delay in bringing back black money, took a miscalculated step? What was the state of preparedness?

Questions are being asked about the wisdom of his advisers. Stakeholders are talking about whether he consulted the top economists before taking the extreme step. Did his advisers do a close study of the impact of demonetisation on other countries?

Amid these, many an economist have started saying that the losses suffered in the wake of this move will far outweigh the gains, at least in the short to medium-term.
About the long-term, no one is sure. But the government is confident that demonetisation will lead to many other reforms in the country and together with GST, it will have a multiplying effect.

Endless queues

Besides a large section of the population suffering at endless queues, among the government’s programmes the GST seems to be its first casualty, at least in the immediate future. States have gone on record saying the April deadline is dead.

Jaitley is now talking about the September deadline which he says is a constitutional obligation beyond which the old tax laws will not be applicable. What if the September deadline is not met? Then there will be another constitutional amendment and the GST will face the spectre of being back on the drawing board again.

The meeting that took place on Sunday was the sixth of the GST Council. So far, it has resolved a big issue of rate structure but an impasse between the states and the Centre, on who will have administrative control over taxpayers in the new tax regime, remains.

The finance ministry has proposed a dual control model which vertically splits the taxpayers’ base. But states including West Bengal, Kerala, Uttarakhand, UP and Tamil Nadu are keen on retaining control over all goods and services providers with an annual turnover of less than Rs 1.5 crore.

The basic contours on which GST is based are uniform rate structure and uniform tax administration. The first contour was breached the day the Centre, apprehending huge revenue losses, came out with an idea of levying cess on luxury goods. The second is staring at a breach if the taxpayers are left to face more than one interface for their assessment. The GST may lose its meaning then. States are well within their right to oppose the move. Analysts are of the view that since GST is a destination-based tax, collection is best left to the states. The audit function can be taken over by the Centre.

Another fear looming large on the early implementation GST is that the states may ask for re-setting the rate structure upward if their revenue losses start shooting due to demonetisation. The finance minister has said he has a game plan for the much-needed consensus on GST. What that ‘game plan’ is and will that work at all, however, remains to be seen!