Dr Bibek Debroy, member, NitiAyog has cautioned against any haste in passing the Constitutional Amendment Bill on Goods and Services Tax (GST). This may sound a bit unusual when all stakeholders are anxiously waiting for its early passage and any delay will be viewed by all and sundry as set-back to the reforms. But, the manner in which even some of the foundational features of a good GST are being diluted, he may well have a point.
First, let us look at Congress proposal to have the GST rate embedded in the Act. This is bizzare! The rate may have to be altered at any point of time depending resource requirements vis-a-vis tax receipts. Hence, there has to be room for flexibility which won’t be available if the rate is an integral part of the Act.
When, there is need for a revision, government will have to go through another round of constitution amendment. In a fractious parliament where opinion is so deeply divided, as it is, consensus among all parties is not easy to come by. Even the process is time consuming as in addition to approval by both the houses, 15 state assemblies need to approve it. So, by the time alteration in the rate is enacted, damage would have already been done.
The second point of concern is levy of additional 1% tax on supply of goods and services in the course of inter-state trade. This is an origin based tax to be collected by central government and given to the state from where the goods originate. This should have no place under GST which is a consumption based tax. Entities/business enterprises paying this tax will not be able to claim set-off and therefore, will have a cascading effect on prices.
Until 2006-07, central sales tax [CST] was levied @4%. To prepare ground for launching GST, CST was reduced to 3% in 2007-08 and further to 2% in 2008-09. The idea was to eventually eliminate it to coincide with introduction of GST. While, CST still continues @2%, a devious mind seems to be at work to retain it under a new garb [old wine in a new bottle]. The levy of additional tax on inter-state trade will be much worse than CST as unlike the latter which is levied only on goods, this will be on both goods and services.
An argument that this was done to accommodate concerns of producing states like Gujarat, Maharashtra and Tamil Nadu etc who feared loss of revenue under GST, is weak and untenable. This is because already there is provision to compensate states for loss of revenue @100% in first three years @75% in 4th year and @50% in the 5th year. Hence, it makes no sense to give them more leeway and that too at the cost of making GST architecture flawed.
Third, the government has excluded crude oil, petroleum products [POL] and natural gas from the ambit of GST. On these products thus, states and centre will continue to levy VAT [value added tax] and excise duty [ED] respectively. Being outside GST value chain, refineries and oil marketing companies will not be able to claim credit for taxes paid on raw materials and other inputs leading to cascading effect. Considering their use in almost every segment of industry, business and services, the impact will be widespread.
The government intends to include these products in future on a date to be determined by GST council. This does not instill confidence. The decisions in the Council will be taken with three-fourth of the weighted votes of the members present and voting. Union government will have one-third of the weight in the votes and each state has equal vote in the remaining two-thirds. Considering that states have a vested interest in continuing with their present high revenue from these products, they will never vote for bringing these under GST.
Fourth, electricity generation and distribution is excluded from the ambit of GST. Under the Constitution, Entry 53 in the State List of the Seventh Schedule empowers the States to impose tax on sale and consumption of electricity, except when consumed by the Government of India or the Railways.
Though, Electricity has been held to be a ‘good’, but it is presently exempt from CENVAT, and VAT. Such exemption results in a situation whereby those engaged in its generation and distribution are not allowed any credit for the taxes applied to inputs used in these processes. Thus, the excise duty or the state VAT paid on equipment and stores get embedded in the cost of the end product. This, together with the non-creditable electricity duty, results in substantial tax cascading when electricity is used as an intermediate input by the industrial and commercial users.
If, electricity is included under GST and thus becomes taxable, full credit would be available for the taxes paid on inputs. It would significantly reduce the cost of power projects and consequently the cost of generation and distribution of electricity. The lower costs will also benefit the downstream industries. Yet, the bill does not provide for its inclusion.
Fifth, there is pressure on government [mainly from Congress] to set up a forum of judges for dispute resolution. This is bewildering. Tax policy is an area that lies strictly within the jurisdiction of the parliament/state legislatures and the executive. The proposal is not only patently unjust and illogical but also strikes at the very structure of the constitution. GST is an ideal platform for settling tax related disputes and is rightly proposed in the bill.
Sixth, the main opposition party has yet another bizarre proposal whereby in the GST council, the share of Union government in the weighted votes should be reduced to one-fourth while increasing the share of states to three-fourth. If accepted, this will tantamount to reducing the centre to a non-entity. This would mean that even in areas like CGST [central GST], states will hold sway.
A GST Act with aforementioned features will be a defective piece of legislation and will militate against the very objective of putting in place a unified/seamless market, ease of doing business and elimination of cascading effect. It would be much better to wait and get all stakeholders on board for an architecture that is free from anomalies instead of going ahead with a flawed stuff merely to meet a deadline.