GST: India's Goldilocks Moment
For the Indian Union – a union of states – GST heralds a necessary unifying ground, propagating an equable idea of Indian-ness.
Article 1 of the Constitution, describes India as a "Union of States", containing all the usual features of a federation, i.e., a three-tier government, a division of power, a written Constitution and its supremacy. The Constitution, being federal in structure, divides all power – legislative, administrative, financial and executive – between the Centre and the states. The Constitution, under its articles 268 to 293, separates the financial power between the Centre and the states. The Parliament has the exclusive power to levy taxes on subjects enumerated in the Union List and the State legislature has exclusive power to levy taxes on subjects in the State List. Both the Parliament and state legislature can levy taxes on subjects in the concurrent list and the residuary power is vested with the Parliament of India.
The devolution of financial power was a prerequisite for building Indian-ness. One of the greatest challenges at the time of Independence was to adopt a stronger edifice of Indian-ness, where every citizen shares a collective sense of economic destiny, social equality and harmony, despite belonging to different beliefs and cultures that constitute the multi-cultural Indian fabric.
At the political level, democracy and elections are the most influential institutions that bind the country together. At an economic level, to strengthen the Indian-ness, we need to develop a common market by removing barriers for the free flow of people and goods across state boundaries. The economic Indian-ness can be achieved mainly in two ways: first, by investing heavily in physical infrastructure and connectivity; second, by adopting a uniform tax regime (Goods and Services Tax) that can create a common market throughout. The previous system of indirect taxation has led to Balkanisation of the Indian market with multiple tax rates and states imposing protective tariff barriers to inter-state trade.
The rationale for adopting GST is the belief that all states of the Union of India are equal and are a part of a national project of balanced economic development with minimum interstate disparities. In a democracy, all states of the federation have an equal responsibility towards the welfare of citizens. In an economically diverse country like India, where states are at different levels of economic development, it is essential that every citizen gets access to a common market without any blockades. The Constitution of India, under Article 14, provides equality to all its citizens, irrespective of their resident state emphasising that the individual citizen, rather than the state, is the locus of balanced development. This equality is the guiding principle of GST.
Adoption of GST is one of the most prominent economic accomplishments in the history of India's Fiscal Federalism. One of the critiques of India's growth story is its sluggish manufacturing sector, which has failed to create productive jobs for millions entering the labour market every year. To make India a global manufacturing hub, it is vital to create a business-friendly environment for foreign investors and companies. Some critical impediments hampering manufacturing growth have been the rigid labour laws and an uncertain and unpredictable indirect tax rate regime of the past. The pre-GST indirect tax regime is fuelled with the multiplicity of taxes, cascading effects and substantial compliance costs. They all increase the cost burden, making India's manufacturing sector uncompetitive vis-à-vis the world. The adopted GST structure is a destination-based tax subsuming majority of indirect taxes levied by the Centre and the states, ending the regime of inefficient indirect tax structure and its cascading effects. Thus, it is a right step in the right direction to give a boost to manufacturing activity in India.
GST has also helped reduce the transaction cost associated with interstate movement of goods and enhanced overall tax revenues. As per the Finance Ministry, India collected Rs 7.41 trillion in taxes in the first year of GST (July' 17- March'18).
The benefits associated with adopting GST cannot be emphasised enough. However, some issues have been reported. Most stakeholders supported the idea of GST but raised concerns about its implementation and design. The design of GST (in terms of the three-tier structure: CGST, SGST and IGST) that has been adopted, is best suited to our federation. The Constitution grants autonomy to both the Centre and the states to levy taxes in the matters enumerated in the Union List and State List. By adopting GST, the Centre and states have decided to cede their fiscal autonomy for the larger interest of the nation. This grand bargaining is a milestone in the history of India's cooperative federalism.
Proponents of single GST (one nation one tax) have argued that all over the world, GST has the same notion. The countries which have adopted GST have a single rate of taxation. The argument is at best half-valid since the most contentious issue that needs to be considered is the governance structure of these respective countries. A single rate-based GST is best suited for countries that have either a unitary form of governance like China or are smaller in size like Singapore. Some countries that have a federal form of governance like Canada and Brazil have a dual structure GST, similar to India.
Similarly, a single rate across all commodities would have created havoc and inflation in the market, leading to regressive taxation. The products which were taxed at a lower rate in the pre-GST structure would have been taxed at a higher rate under GST and, luxuries which were taxed higher in the pre-GST structure, would have been taxed at a lower rate.
However, going further, the present form of GST is far from perfect, and certain issues need to be addressed. These include bringing in specifically excluded items under the GST net, simplifying the multiple GST rates and the return filing process, and strengthening the GST Council.
At the initial stages, some items have not been covered under GST. These include alcohol for human consumption, petroleum products, natural gas, real estate, construction and electricity. It is important to note that these items would be gradually brought under the GST net, and are different from 'exempted items' which attract a GST rate of 0 per cent. While they remain outside the GST purview, they continue to be taxed in the earlier way through the respective state/Centre taxes.
Historically, these items have contributed significantly to tax revenues of the states and the Centre (VAT and Central Excise Tax); therefore, it is a sound decision to allow GST revenues to stabilise before including these under the new tax regime. Discussions on bringing petroleum products under the ambit of GST have already begun at both the Centre and the state-level. This move is expected to lead to further rationalisation of rates of petroleum products in sync with the market-linked fuel pricing mechanism. Efforts should be initiated to also include the other items under the GST system to make the system more uniform.
The GST Council is one of the strongest federal bodies in India. While the sheer number of meetings of the GST Council has been criticised as an exhibition of incertitude, it is best seen as a sign of swift action and commitment on the part of the Council to improve the system. Concerns flagged by various stakeholders have received due recognition as 376 changes have been made in GST since its inception through the amendment of rules, issuance of clarifications and circulars related to refund, exemption and rates.
The GST Council has also fared well to ensure harmonious indirect tax sharing between the Centre and the states, thereby promoting cooperative federalism in the country. It is also to the credit of the Council that this new tax has not depressed consumption or been inflationary. However, the issue of the GST Council making decisions based on consensus instead of voting needs to be looked at. The voting system in the Council requires 75 per cent of the weighted votes as majority; neither can the Centre with 33 per cent weighted votes, nor can the states with 67 per cent of the weighted votes, decide unilaterally on any agenda. This voting pattern has been a source of conflict in the past and has therefore not been invoked to make decisions. However, it is essential that decision-making relies on the stipulated voting pattern in order to strengthen the GST Council in its current form.
To make the GST ecosystem more effective, some provisions for redressal in case of deviation from recommendations must be designed.
Since its inception, the system continues to steadily plod towards perfection. It is a work in progress, and the uneasiness among businesses is the short-term cost to be borne to appreciate the long-term benefits associated with the unified tax regime. Such teething problems are commonplace with regime changes; and, knowledge dissemination and support services by various authorities are assisting in enabling a smooth migration. Going further, it is imperative that the issues pertaining to the multiplicity of rates as well as operational difficulties are simplified at the earliest to honestly realise the aforementioned benefits of 'one nation, one tax'. If the GST Council continues to move as expeditiously as it has in the past, the long road to attaining a perfect indirect tax regime in India will definitely not be a weary one.
(Himanshu Arora, Vedanta Dhamija, Phalasha Nagpal are Young Professionals, EAC-PM, NITI Aayog)