Goods and disservice

48DNarendraModi Building the bridge: Prime Minister Narendra Modi with former prime minister Manmohan Singh and Congress president Sonia Gandhi at a meeting | PTI

Diluting the essence of GST will not serve the purpose

  • It was the finance ministry which decided to make a distinction between consuming states and producing states and put on the table an additional 1 per cent tax.

  • With the GST infrastructure said to be largely information technology-based, many states are looking to set in place digitisation of their tax departments.

Despite the two largest political parties in India, the BJP and the Congress, taking a tea break to discuss the differences over a unified indirect tax structure, the seven-year wait for it may not be over just yet. First proposed in the 2006-07 Union budget by P. Chidambaram, the Goods and Services Tax was supposed to be rolled out by April 1, 2010 and help do away with the complications in the existing system of taxation.

In these years, Chidambaram's proposal has undergone a sea change. And, it is likely to become more than one tax structure with a unified rate. In the beginning, states were reluctant to give up their right to tax goods and commodities. During further discussions of the empowered group of state finance ministers between 2010 and 2014, states refused to give up their 13.5 per cent share of tax revenue even though the tax base was widened for them by including services. The Centre, too, remained stubborn on cornering its revenue share of 13.5 per cent.

After much coaxing by political groups and industry, the GST rate was rationalised to be between 18 and 22 per cent from the 27 per cent proposed a year earlier. Arvind Subramanian, chief economic adviser to the government, concluded that the rate had to be low to widen the base for the new tax. “There was the question of acceptability of the new tax,” said a NITI Aayog official, who was part of a committee headed by Subramanian. “The base for the GST has to grow at significant levels year on year. The challenge was also to look at a revenue-neutral rate whereby neither the Centre nor the states would have to forgo any revenue under the new structure.”

The committee recommended a rate of 18 per cent, which, it said, worked out to be “less than half of the current rate of cascading indirect taxes on goods”. It is estimated that under the value added tax and central excise system, the existing indirect tax burden works out to be around 37 per cent for goods.

The 18 per cent rate is also the cap that the Congress wants prescribed in the GST Bill. Finance Minister Arun Jaitley, however, has warned of consequences arising out of a flawed legislature. “When tariff rate has to be mentioned in the Constitution itself, then it is a flawed architecture. Because the GST with flawed architecture can actually damage the system much more than it can benefit,” he said. There are strong indications that the government may seek to have two GST rates.

The committee has raised some other worries as well. One of them is the additional 1 per cent levy to be paid to the producing states. Last December, Gujarat Finance Minister Saurabh Patel, who was part of the discussions on GST, wanted more compensation. “In order for us to support the GST, we need something back because we have been opposing GST for this long,” he said. Interestingly, Gujarat had opposed the unified tax system citing loss of revenue when Modi was chief minister.


Gujarat's average income from value added tax and other state taxes is around Rs.62,000 crore a year. VAT collection alone is Rs.45,000 crore and the state’s share in central taxes is around Rs.14,000 crore. “Our major sources of income are VAT and CST but in a consumption-oriented tax system, Gujarat may lose its current income and may not be able to achieve its revenue growth projections,” said Hasmukh Adhia, former Gujarat chief secretary who is now Union revenue secretary. The state wanted to get around Rs 76,000 crore and at least a 20 per cent a year growth in tax revenue, he said.

Later, it was the finance ministry which decided to make a distinction between consuming states and producing states and put on the table the solution of an additional 1 per cent tax to compensate producing states. Critics of the suggestion called the proposal ‘Gujarat tax’. “The additional levy is not exactly desirable and this deviates the GST from its goal. As such an origin-based tax structure is already continuing and this would be like replicating the same thing,” said Pinaki Chakraborty, professor at National Institute of Public Finance and Policy and member of the 14th Finance Commission which looked at division of federal resources between the Centre and states.

Currently, the government is continuing to focus on major political parties in the Rajya Sabha, as a two-thirds majority is required to pass the bill. That it has been counting on the support of the regional parties for the passage became evident when Jaitley said after the monsoon session of Parliament that most states were consuming states and hence would support the bill. “The third force you all are talking about is a forum of regional parties, and here most states and most parties favour GST,” he said. In the winter session, too, even as the government is trying to get the Congress on board, it is working on a parallel plan to win over the support of the regional parties.

Parliamentary Affairs Minister M. Venkaiah Naidu said, of 32 parties that participated in the all-party meeting ahead of the winter session, 30 were in favour of the bill. “The public mood is almost one-sided in favour of the GST,” he said. The bill, officially the Constitution (122nd Amendment) Bill 2014, was passed by the Lok Sabha in May, during the Budget session. In the Rajya Sabha, however, where the National Democratic Alliance does not have a majority, the Congress made the government send the bill to a select committee of the house.

The government has reached out to the Trinamool Congress, Biju Janata Dal and the Janata Dal (United) and got positive signals from them. In fact, except for the Congress, the Left parties and the AIADMK, no party has taken a strident stand against the bill. Getting the support of the DMK, which has four members, and nine one-member parties will be important for the government to meet the numbers.

In a boost to the government’s efforts, Samajwadi Party leader Naresh Agarwal said his party was for GST. “We are supporting it. We had suggested some changes in the select committee and they have been incorporated,” he said. Surprisingly, his comments came just hours after Chief Minister Akhilesh Yadav, in what looked like political posturing, criticised Bahujan Samaj Party supremo Mayawati for her unconditional support to the bill. “Without thinking much, anyone is expressing support to the GST Bill in Parliament. The state would be at a loss,” he said.

Mayawati said her party had always maintained that it would support all the bills that were in the interest of the nation. “The government has and has been repeating that it [GST] would benefit the country,” she said.

The Nationalist Congress Party’s Praful Patel said his party wanted the GST Bill to be passed in this session itself. “The NCP fully supports the GST Bill,” he said. “However, if some good suggestions or amendments come, the government should consider them with an open mind.”

A major boost to the government was the support of the JD(U). Party leader K.C. Tyagi said Bihar would gain in the GST regime as it was not a manufacturing state. “However, we want manufacturing states like Maharashtra and Tamil Nadu to be compensated for their revenue losses. Also, we want the government to address the concerns raised by the Congress,” he said.

The BJD, which keeps both the Congress and the BJP at a distance, has spoken in favour of the GST, but with riders. “We want two crucial changes to be made in the Bill,” said BJD leader Bhartruhari Mahtab. The first demand is that the 1 per cent additional tax being given to manufacturing states should also be extended to mineral-bearing states. And the second is a cap on the GST rate.

The Left parties fear the proposed law will have an impact on the federal structure of the country as the Centre will have a veto power in the GST Council. “We are worried that the GST Bill in its present form has the capacity to mess with the federal structure of the country,” said the CPI(M)’s deputy leader in the Rajya Sabha, K.N. Balagopal.

The Congress is in no hurry to finalise its views on the bill. In fact, the party is not expected to make any decisive move till the return of its president Sonia Gandhi from the US. “The Congress party believes that when you are coming up with such a major constitutional amendment, which deals with indirect taxation and also is a progressive tax reform, it must not be rushed through and it should benefit our people and India’s economy,” said Anand Sharma, the Congress’s deputy leader in the Rajya Sabha.

The AIADMK has been opposing the bill saying Tamil Nadu would lose nearly Rs.9,000 crore a year in tax revenue. Besides, the party is of the view that the proposed GST Council is tilted in favour of the Centre. Jaitley is said to have held discussions with Tamil Nadu Chief Minister J. Jayalalithaa twice on the issue, and Modi met her during the monsoon session of Parliament.

With the GST infrastructure said to be largely information technology-based, many states are looking to set in place digitisation of their tax departments. “A review of infrastructure at the Centre as well as state level is required to assess the readiness for GST,” said Adhia. A proposal to build an overarching IT-based tax system, GST Network, is under consideration of the finance ministry.

Key to the GST debate is also the unresolved issue of inclusion of certain items under the unified tax regime. States have still not agreed to give up their rights to tax petroleum products, alcohol, electricity and construction materials. States have also sought the right to tax luxury items. “Petroleum products and alcohol are a major source of revenue for states and a major intermediate for industries. Even though the bill talks about including oil in the GST net, it has been left open-ended, saying that the GST Council can include it later. With this arrangement, cascading effect of indirect taxes will still continue,” said Chakraborty.

And, a GST that is merely nominal is not what India Inc wants. “There are many add-ons in the design structure of the new tax,” said Satya Poddar, tax policy adviser at consultancy firm Ernst and Young. “It goes against the principal objective of making India a common market.”

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The Week

Topics : #business | #GST | #taxes

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