GST & cooperative federalism

With barely a fortnight to go, the lingering question with a significant import on the efficient functioning of the domestic economy pertains to whether the much-ballyhooed Goods and Services Tax (GST) is wrapped and ready for rollout on the deadline of July 1 as devoutly desired by the Centre? This is particularly the case today as a couple of States/UTs including Tamil Nadu and West Bengal still harbour doubts about this significant indirect tax reform that potentially unifies a plethora of Centre/State/local levies to improve the ease of doing business in India.

With a final GST Council meeting slated on June 18 to take stock of the rollout readiness and any new proposals from States, the GST Council in its penultimate meet on June 11 resolved to revise tax rates on 66 products and enlarged the elbow room of a concessional tax payment scheme for small businesses and restaurants. The feisty Union Finance Minister Arun Jaitley who is credited with single-handedly pushing this decade-long tax reform with the ardent effort said the Council went an extra mile to lower the tax burden on many of these items even below the level of the tax burden they currently impose, taking into account altering consumption norms and economic realities. This is so even as the tax burden on some of these items was historically high with the Council having been inundated with proposals seeking relief on 133 items.

Accordingly, the tax rate on job works was lowered to enable outsourcing of business activities. The tax rate on movie tickets costing less than Rs 100 is likely to be at 18 per cent, while those above this would attract 28 per cent. For the tinsel world which relies on the common man's support on the principle of economies of scale, this would be a breather as lakhs of cine-goers cannot fork out a hefty 28 per cent tax on the only entertainment and recreation they have in an otherwise drab daily life.

The scope of the concessional scheme—a presumptive taxation scheme letting small traders, manufacturers and restaurants to disburse a 1-5 per cent GST rate on total sales without tax credits, has been widened to incorporate assesses up to a turnover of Rs 75 lakh from the Rs 50 lakh ceiling fixed earlier. This would permit more small businesses to avail of a hassle-free compliance regime since the new format GST compliance forms would be a bit intractable to grasp for many a small businessperson. Under this window, eligible traders can pay a tax of 1 per cent of sales, while manufacturers can pay 2 per cent and restaurants 5 per cent, the same rates set earlier. The objective to enlarge the scheme is based on the fact that these segments are large job creators, a priority programme of the government.

On June 3, the GST Council wound up the fitment rates for a few contentious goods such as gold, diamonds, biscuits, textiles, farm machinery, readymade garments and footwear. Having finalised and fitted the rates on well-nigh all commodities and services into different slabs, though a far from ideal norm of one tax rate that the GST is promised to presage, the potent GST Council is also making efforts to ensure that businesses pass on any tax cuts benefit to consumers when the new indirect tax regime comes into force on July 1. But this is a delicate job as the corporate houses do not like their minimum profit to evaporate by the return of an inspector-raj in the form of supervising anti-profiteering machinery! So the task ahead for the GST Council demands dexterity as it should not kill the goose that lays golden eggs by cracking the whip too harshly or inculcating any fear psychosis in the minds of businesses.

No doubt, the GST Council—comprising the Union Finance Minister as the Chairman and all the Finance Ministers of States and Union Territories as members—is a Constitutionally-mandated responsible forum to make decisions on consensus after hearing the viewpoints of all stakeholders. At the end of the day, in a federal set-up, the decisions from the GST Council by consensus mean that those who disagree with it also make a common cause of bolstering the implicit spirit of cooperative federalism by not staying away from implementing them.

Late last year, there was a broad agreement on five GST slabs: 0(the exempted category), 5, 12, 18, and 28 per cent. There was also agreement that cesses—to finance possible compensation to the states—would be levied on certain demerit goods such as tobacco and related products, aerated beverage, luxury cars, etc., With the GST Council earlier this month setting the tax rate on gold, silver, diamond and other jewellery at 3 per cent and uncut diamonds a notional duty of 0.25 per cent, there are now effectively seven slabs. With the exemptions for critical sectors like health and education, real estate, electricity, petroleum products and alcohol, GST in its extant form is manifestly far removed from the "One Nation, One Tax" it is touted to be.

Since GST is a consumption tax, experts observe that it should not be tasked to do heavy-lifting like meeting other political goals such as protecting employment, industrial policy, and social engineering. They point out particularly the five disparate slabs within GST which mean mass consumption items having a vital bearing on those living on margins are protected from being charged the higher rates.

Proposals for a pan-India value-added tax were in the making for decades with the consensus for moving to a national level GST to be shared by the Centre and the States culminating in the Budget 2006-07 when it proposed a timeframe for its introduction. But it has taken quite a decade now as the new rollout is slated for July 1, 2017. The delay could partly be explained by the fact that Constitution barred the Centre from taxing sales and empowered it with the exclusive right to tax services. Hence, it was deemed a necessity to forge a 'grand bargain' between the Centre and the States to enable taxation of sales by the Centre in exchange for a share of GST revenue to the States.

It would be safe and orderly if the outlier States/UTs do hasten to pass the relevant legislation in their Assemblies so that the process of ushering in a GST seamlessly across the country is not derailed and that the spirit of cooperative federalism evident lately is not lost to the holistic development of the country.
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