Still a long way to go before the finish line

The monsoon session is one month away and the government is running out of time. Barring a few reservations, most state governments are on board. Intended to subsume many of the Central and state indirect taxes, the GST Bill is expected to transform the indirect tax structure. 

Today, there is a plethora of taxes and levies imposed goods and services by state governments and the Union government. This places an excessive burden of indirect taxes on the common man. To further expand on that point, the current system taxes end-consumers and market stakeholders at multiple stages.

 Instead of paying a plethora of taxes at the state and Central level, businesses around the country will have to pay only a single levy once it is enacted. As an ambitious overhaul of India's labyrinth of indirect taxes, the GST attempts to give business enterprises across the country a boost while also encouraging transparency. 

The bill was to be implemented from April 1, 2016, but opposition from Congress over key clauses including a cap on the tax rate had stalled its passage in the Upper House. Admittedly, the delay in legislating India’ biggest indirect tax reform began before the Modi government. Back when the Congress-led UPA government was in power, it was the BJP, which opposed the Bill tooth and tail.

 Out for revenge, the Congress is paying back the BJP by raising unnecessary hurdles. GST was supposed to be introduced by April 1, 2015. But now, the GST can only be implemented on April 1, 2017, provided the Centre passes the legislation in the upcoming monsoon session.

On the contentious issue of the constitutional cap on the GST rate, Centre has managed to convince Finance Ministers of 22 states to support the idea that the tax rate should not be mentioned in a constitutional amendment. The Centre had previously argued that including a cap on the tax rate would require an amendment to the law every time the tariff needs to be revised.

 “No tariff can be perpetual. If volumes increase, it can go down. In a crisis, it can go up. None of your (UPA) Finance Ministers proposed it. How can we go every time to the states if we want interest rates to be raised,” the Union Finance Minister said. Jaitley is right when he describes the Congress proposal to enshrine a cap on the GST in the Constitution as preposterous. 

Governments must also always strive to maximise the tax/GDP ratio so that States have enough money to invest in assets that will beget more taxes. In other words, tax levels must never be capped. The Congress party’s insistence on a GST cap is out of sync with reality and the states seem to agree. However, two issues remained unresolved after the meeting of state Finance Ministers earlier this month. 

A revenue-neutral rate is yet to be finalised. It’s a tax rate that does not cause a loss to states in a new tax regime. Another issue is that of dual control. These will be discussed at the next meeting of the empowered committee of state finance ministers in July.

In a recent column, TMC Rajya Sabha MP, Derek O’Brien raised a critical point on the question of dual control: “The GST regime presents a challenge of dual control - scrutiny, audit, assessment, and inquiry by state officials as well as central officials. This will be time-consuming and increase chances of corruption. Trinamool Congress suggested small dealers, with a turnover below Rs. 1.5 crore a year, be exempted from dual control. 

Finally, the Empowered Committee of State Finance Ministers, headed by my colleague Amit Mitra, the Finance Minister of West Bengal, accepted that small dealers be kept out.” Not counting the Congress and the Left parties, the Centre has more or less managed to convince most parties of the bill’s merits. The hypocrisy of the Left parties on the GST Bill leaves one a bit flummoxed. In Delhi, the Left has opposed the legislation. 

However, its government in Kerala, which realises the GST’s merit to governance, is supporting the bill. During his recent visit to the national capital, Kerala’s Finance Minister had announced that he was in favour of the legislation. However, another party opposed to the Bill, which the Centre must take note of is the AIADMK. Political machinations aside, the AIADMK raises valid points in its dissent note against the GST Bill. If the NDA government wants to pass the bill in the Upper House, it will probably need the AIADMK on its side.

“Some provisions of the Constitution (One Hundred and Twenty-Second Amendment) Bill i.e. Goods and Services Tax Bill are likely to adversely impact the federal structure of the country. There is a need for decentralisation of powers and devolution of the taxes in favour of the States and further to the Local bodies. Fiscal Federalism and protection of the powers of the states are important,” the party said in its dissent note against the GST Bill.

 In other words, the party’s objection pertains to the GST Council, which is being seen as impinging on the sovereignty of state legislatures. The dissent note goes on to add: “The clauses are designed in a way that the Centre will have absolute powers in deciding tax proposals. 

This is likely to harm the concept of Union and States. It will be turning into a structure of Union alone...GST should not be in the interest of big corporate houses, who want a free flow of goods and services with the technology promoted and owned by them. 

With the Centre having an absolute say over the decision-making process on the GST, the States will lose its financial independence in the long run and corporate will dictate the policies of even the local Governments.” One must remember that the GST Bill seeks to restructure India's federal system. The Centre must pay heed to these federal dynamics and introduce GST as soon as possible.