GST passage gives Modi a shot in the arm

The Modi Government, after a two-year drought, hit a “glorious moment” early into the third year, with Parliament adopting the long-delayed Constitution Amendment Bill to facilitate the introduction of a nationwide Goods and Services Tax (GST). In theory, it is excellent but will it work as envisaged, given the heterogeneous nature of the states’ demands and the multiplicity of rate structures to be reformed?

This unprecedented reform in India’s taxation history hailed as the biggest in 25 years after the path-breaking era of liberalisation launched by a Congress Government in 1991, is now seen to strengthen Prime Minister Modi to push ahead the “unfinished” reform agenda.

Spectacularly, GST is to subsume the clutter of local, state and national levies into a single tax and thus create a vast common market for its 29 states with 1.3 billion people – “One Nation One Tax”. (Hopefully, BJP’s current obsession with “one-ness” will not land them into pining for “one country, one party!”) 

By far the biggest step toward “ease of doing business”, GST is hailed by commerce and industry with gusto, with major firms counting gains. The unorganised sectors will, however, run into newer difficulties to unfold gradually.

In the new era of “fiscal federalism” envisaged, the states get deprived of their fiscal autonomy, to a great extent, and so the Centre, with primary responsibility, has the harder task of aligning the States behind for a smooth launch of GST with agreed rates. The Centre is no doubt committed to compensating States for losses for the first five years.

The Centre and the States will get a share of the unified GST collected nationally, whatever the respective proportions, an area of contention.  But the real challenge is the rate of determination at the GST Council which, comprising Central and State Finance Ministers, will be set up after half the States have ratified the Constitution Amendment Bill and it gets the President’s assent.

Differing ranges of rates - the standard rate with maximum and minimum rates - are being proposed and the Council has to firm up a consensus on a structure acceptable to both the Centre and States. The Congress opposition in Rajya Sabha, which finally voted for GST after months of deadlock, wants the standard rate capped at 18 percent, as recommended by an official committee chaired by the Chief Economic Adviser.

Finance Minister Arun Jaitley sees an 18-20 percent range as a more feasible option taking into account revenue requirements which, he says, should be sufficient to meet developmental needs of Centre and States.  The States, fearing loss in the bargain, want it well above 20 percent. Jaitley concedes inflation will depend on slabs and rates fixed.

The tax burden will lower for major industries like steel, cement, logistics etc. End-users will remain at the mercy of producers. There are no built-in provisions for safeguarding interests of consumers who are virtually left out in the cold, beyond theoretical acceptance by the Finance Minister that the inflationary impact of whatever rates are agreed on should be kept as low as possible.

Glib assumptions are made that with costs of doing business coming down, producers would be able 

to pass on the benefit to consumers. Services would bear a higher tax and so the providers would pass on the burden to users adding to household expenditure. In short, GST holds the prospect of not cheaper goods but unremitting inflation with the cascading effect of a tax on services of all kinds, not excluding educational and health services.

The GST bill emerging from Parliament has miles to go before this enabling measure can turn India into one market. But a single GST for the country looks unlikely at present. The Centre and States have to enact their own GST laws with rates as codified by the Council. Meanwhile, the Empowered Committee of Finance Ministers would have worked on rates, exemptions (petroleum goods, alcohol etc), threshold limits and inter-state trade issues for IGST (Integrated Goods and Service Tax).

The Constitution Amendment Bill enables the GST Council to establish a mechanism to adjudicate disputes but critics point out, it cannot overlook Article 131 of the Constitution which allows states to approach the Supreme Court for adjudication of disputes between states or between the Centre and one or more states.

The States, zealous of their taxation powers under the Constitution, will finally have to reconcile themselves to fiscal autonomy being frittered away while going into GST with great uncertainty of how it would affect their finances over the long haul. They cannot also resort to surcharges or cesses.

Tamil Nadu under AIDMK, the third largest Party in Parliament, contends that the bill violated States’ fiscal autonomy and would cause permanent loss of revenue for a leading manufacturing state. The party members walked out avoiding voting. Other manufacturing states, under BJP control, are holding their breath.

Chief Minister Jayalalithaa’s assertive stance is a blend of economics and politics on a national plane. With unbridled welfarism, Tamil Nadu’s finances are unsound. She has faulted the Centre on devolution and can be expected to play her cards for 2019 Lok Sabha elections. Within the State, it improves the image of her Government which has to contend with a formidable DMK opposition.

With Parliament having to pass the Central GST Bill and IGST Bill to complete the legislative process, Jaitley’s wishful April 2017 deadline is unrealistic. For the Congress, the battle shifts to ensuring a standard rate which will not be “anti-people”, say 18 percent.  

Former Finance Minister Chidambaram, now in Rajya Sabha, also urged that the next two bills should be introduced as finance bills, not as money bills to obviate a debate and vote in Rajya Sabha, a demand backed by non-BJP parties. The Finance Minister skirted the issue.

Jaitley’s anxiety is more to see that roll-out of GST does not extend into 2018/19, so close to the 2019 Lok Sabha Poll, while clinging to the illusion of low inflation and boost to GDP to 8 percent.