Union finance minister, Arun Jaitely and chairman, GST [Goods and Services Tax] Council must be credited with spearheading requisite efforts viz. draft of all related laws viz. central–GST [CGST], state-GST [SGST], integrated-GST [IGST], legislation on compensation to states for loss of revenue, delineation/apportionment of powers for administering the tax, determination of rate structure etc in a time bound manner to ensure that this revolutionary tax reform is kicked off from April 1, 2017.
The pace at which GST Council was progressing, it was almost certain that the government would meet the deadline. But, the announcement by prime minister, Modi on November 8, 2016 to demonetize the 1000/500 currency notes [a bold move to decimate the scourge of black money and setting India on to a new journey of less-cash] came as a spoke in the wheel. Almost the entire opposition ganged up to paralyze the winter session of the parliament over this issue.
As a result, the necessary bills could not be taken up for consideration which was the original intent. Jaitely now proposes to do it in the budget session beginning January 31, 2017 so that GST could be launched from July 1, 2017 well before the September, 2017 deadline [as per constitution amendment Act, from this date, the extant dispensation of taxation viz. excise, VAT etc will go; hence, GST must come in].
The potency and effectiveness of any policy reform has to be judged from its design/architecture and its implementation. This in turn, is inextricably related to the objective. It has to be a ‘single’ and ‘uniform’ nation-wide tax applicable to all territories/geographies in sync with an overriding philosophy of achieving a common market enabling seamless flow of goods and services.
In keeping with this philosophy, a committee set up by 12th Finance Commission under chairmanship of Dr Vijay Kelkar had recommended a single GST @ 12% of which union government should levy CGST @ 5% and states impose SGST @ 7%. Ideally, this should have been the way to go forward; unfortunately, from the day one, our policy makers have drifted from this scenario.
A panel under chief economic adviser [CEA], Dr Arvind Subramanian had proposed a 3-tier structure viz. 12% for essential goods, 40% for so called de-merit goods [luxury cars, aerated beverages, pan masala and tobacco products] and standard rate of 17-18% on all remaining goods. The panel excluded real estate, electricity, alcohol and petroleum products while calculating rates but suggested bringing them under the ambit of GST soon.
On the other hand, in its meetings held on November 3-4, 2016, the Council decided to go for a 4-tier structure viz. 5% for essential and daily use items, two standard rates of 12% and 18% and highest rate 28% on de-merit goods [this is in addition to an ‘exempt’ category taking the total tiers to 5]. Additionally, it decided to levy cess on the de-merit goods which would vary depending on the product under consideration.
So, even if the government goes for 4 different rates of cess for 4 sub-categories under demerit head, it will become a 8-tier structure [5%, 12%, 18%, ‘4’ rates for demerit and exempt]. And, if the government becomes overzealous in treating each demerit item differentially on the basis of its specific characteristic [for instance, within luxury cars], the number of rates could increase manifold.
Lately, following representations by trade and industry associations, the Council is also veering around to consider multiple rates in services too. For instance, the industry wants service like telecommunications, transport, banking etc to be taxed at a lower rate. A proposal doing the round is to have at least a 3-tier structure for services.
With all these changes, resulting architecture will be far removed from the desired ‘unified’ and ‘simplified’ tax regime. It will also give lot of discretion to bureaucrats leading to corrupt practices even as business entities lobby to get favorable deals [getting their product included in a class that attracts low rate] for them. This will militate against Modi’s objective to eliminate corruption and black money. There are other loopholes in the scheme of things.
Under the constitution, municipal authorities and other local bodies in states have been given powers to levy taxes at the local level. Although, the constitution amendment Act on GST provides for such levies like octroi, entry tax to be subsumed in it, local bodies won’t easily let these go away being a major source of revenue. The absence of any legal barrier [GST notwithstanding] makes them more resolute.
The Council has not included real estate, electricity, alcohol and petroleum products under GST. Barring alcohol, all other areas touch the life line of economic activity and their exclusion will ensure that cascading cost push effect of extant levies [excise, VAT, local levies etc] will persist. Besides, stakeholders in these segments will also have to live with cumbersome procedures and delays associated with their administration.
In regard to administration of GST, the Council has decided that 90% of all assesses below Rs 1.5 crore [annual] threshold will be overseen by states and balance 10% by centre, whereas assesses above Rs 1.5 crores will be administered by centre and states in 50:50 ratio. The dual control inherent in this arrangement will lead to lot of hassles and extra cost to industry and trade.
In short, it turns out that the proposed GST architecture is nowhere near an ideal consumption/destination based ‘unified’ regime and continues to be shackled by bad elements of existing dispensation. The package in the making sounds more like ‘old wine in a new bottle’.
This is due a lurking fear among states that they will make huge losses under GST. They need to recognize the power of GST in making GDP grow faster and boosting tax collection. Once this is done, they will be fully wedded to this reform and make way for a tax structure that is truly aligned to its underlying ‘spirit’ and ‘potential’.