GST: Think of the economy, not politics

Janak Raj Gupta

THE implementation of GST (Goods and Services Tax) would be the greatest indirect tax reform ever since Independence, leading to a simple and uniform taxation of domestic trade. Earlier reforms such as modified value-added tax (Modvat) Central value-added tax (Cenvat), state value-added tax (VAT) etc. were implemented piecemeal. Before the implementation of state VAT in 2005, complex domestic trade taxation was characterised by multiplicity and non-uniformity of rates of taxes. This increased the compliance cost both on the government and the taxpayers. 

The cascading effect of taxes not only discouraged specialisation but also made our goods and services costlier, leading to a fall in export demand. Although VAT had addressed most of these issues, yet the problem of cascading effect, that is tax on tax, remained unresolved because every state had its own VAT laws.  There were nearly 28 state tax laws. Every state gave credit for VAT paid on intra-state (within the state) trade and not on inter-state (between the states) trade. Besides, we still continue with Cenvat, service tax, union excise duty and host of other state and central taxes as well as fees levied by local bodies. However, GST would be a single uniform tax covering almost all goods and services across states, giving credit to taxes paid in the course of inter-state as well as intra-state trade.

The implementation of VAT took nearly 20 years, after Modvat was adopted in 1986. Buoyed by the success of VAT, and mindful of the need for further improvement, the Government of India has been toying with the idea of having a single tax in the entire country, covering all goods and services. 

In 2007, to implement  GST, an Empowered Committee (EC) of Finance Ministers of states was constituted and the EC and the Government of India prepared the first model roadmap in April 2008. It recommended a dual GST and provided preliminary views on the state and central taxes to be subsumed within it. It also detailed the operational issues which needed to be addressed, including the number of rates, the exemptions and exclusions from GST as well as the treatment of inter-state trade.  Agreement on the broad framework of this tax has now been reached. 

The GST will be a dual tax, with both central and state components levied on the same tax base. All goods and services, excluding the agreed-upon exemptions, will be brought into this base. No distinction between goods and services will be made and a common legislation will apply to both. 

The objections raised by the Congress are: Scrapping the provision of allowing states to impose additional one per cent over and above the statutory GST rate; reducing the overall GST rate to 18 per cent and inclusion of tobacco, electricity, petrol and alcohol among items to be covered under the GST regime. Also, there is the feeling that a greater representation for states in the dispute-redressal mechanism is needed. 

The GST will be levied on the destination principle, where the final consumption occurs. There is an apprehension that the manufacturing states and poorer states with a low consumption base might suffer. There will be no losers as no state is self-sufficient enough to meet its all needs. When the states will be compensated for all their losses in revenue for five years, there seems no logic whether this condition is accepted or not.  The Thirteenth Finance Commission estimated the revenue neutral rate to be 12 per cent, whereby there will be no gains or loss in total indirect tax collections when GST subsumes all such taxes. 

Since GST would be dual, the rate suggested for the Centre was 5 per cent, whereas states could levy 7 per cent. Considering that the service tax rate has been enhanced to 14 per cent from 12 per cent and many states have also increased the VAT rate, 18 per cent or 20 per cent cap on GST rate  would be justified. The GST will affect the low-income group more than the higher income one. So its rate structure should be kept low to favour the poor. Higher rates may encourage tax evasion.   As far as inclusion of tobacco, alcohol, petrol and electricity among items covered under GST goes, in the proposed GST regime these have been excluded. One cannot group all these commodities in a single category. The consumption of tobacco and alcohol is considered injurious to health so these need to be taxed at much higher rates. The consumption of petrol and diesel generates negative externalities. Besides, in states like Punjab tax on petrol constitutes a good source of state revenue. There would be no harm if petrol and diesel is kept outside the purview of GST. Tax on electricity, however, is a debatable issue since the use varies from domestic consumers to industrial and farm producers. For greater representation to states in the GST Council, in the proposed law two-third members of the Council will be taken from states and the rest from the Centre. In the GST regime, states would lose their financial autonomy so the representation of states needs to be enhanced to three-fourth, as demanded by the Left parties. It may be recalled that in our federal structure there is an in-built bias in favour of the Centre.

Local self-governments in the post-GST regime will have to forego revenue from octroi, entertainment tax and entry tax. A constitutional mechanism must be instituted to safeguard their financial interests and ensure that revenue from GST continues to form part of the divisible pool. Direct taxes constitute hardly 50 per cent of the total tax revenue that is shareable. 

Earlier GST Bills have been torpedoed at the altar of petty politics. The first GST Bill was introduced in March 2011, which was opposed by some state governments, mainly the BJP governments. The Bill could not be passed and it lapsed on the dissolution of the 15th Lok Sabha. After the BJP government came into power in May 2014, the GST Bill was again introduced in  December 2014 but was struck down in the Rajya Sabha due to lack of requisite majority. Soon, elections will be held in many states, including Assam, Punjab, Kerala and Tamil Nadu. Political parties showing magnanimity might be rewarded.

The writer is a former Professor of Economics, Department of Economics, Punjabi University Patiala & UGC Emeritus Fellow.