On May 6, 2015, Lok Sabha passed the constitutional amendment bill on Goods and Services Tax (GST). The government strategists are working hard to get this approved by Rajya Sabha (RS) where the ruling NDA [National Democratic Alliance] is in minority. The bill is listed in agenda for RS on May 11, 2015.
There is a distinct possibility of it going through in RS as Congress which uses every opportunity to embarrass the ruling establishment [Dr Manmohan Singh even suggested that the bill be referred to the Standing Committee] cannot afford to be seen as sabotaging or delaying a bill it had introduced in 2011 and has narrated its virtues umpteen number of times.
GST has the potential to increase country’s GDP (gross domestic product) by up to 2% by enabling a common/integrated market, removing the cascading effect of taxes & duties and substantially enhancing ease of doing business. Yet, majority of states have acted in most conservative manner and as reluctant partners in this national endeavor.
Their concern due to loss of revenue especially among manufacturing states such as Gujarat, Maharashtra, Tamil Nadu etc (as GST is essentially a consumption based tax) was understandable. So, they wanted full compensation and provision in this regard to be incorporated in constitutional amendment bill, given their not so happy experience in dealing with centre in the past.
Modi – government has agreed and proposed to compensate them @ 100% in first three years, @ 75% in the 4th year and @ 50% in the 5th year. In addition, it is also fully committed to compensating them for past losses due to lowering of CST (central sales tax) from extant 4% to 3% in 2007-08 and 2% in 2008-09 which erstwhile UPA government promised but did not deliver.
To demonstrate that it is serious about its commitments, in the revised budget for 2014-15, the finance minister, Arun Jaitely made an allocation of Rs 13,000 crores to cover un-met liabilities for the period up to 2010-11 even at the cost of risking slippage in the fiscal consolidation target for that year.
That it cares so much for their financial needs – in a true spirit of cooperative federalism – would also be clear from prompt decision of Modi – dispensation to accept recommendation of the 14th Finance Commission to increase the devolution from central government’s tax collection to states from extant 32% to 42%.
With the aforementioned adding up to complete comfort in respect of past liabilities as also for the future plus the potential that GST offers, it was only logical that states had given un-conditional and un-encumbered support to the proposed dispensation. Yet, they have forced too many conditions which may result in seriously undermining its effectiveness.
For now, government has acceded to states demand for excluding crude, petroleum products (POL) and natural gas from ambit of GST. This means that on these products, states and central government will continue to levy VAT [value added tax] and excise duty respectively. Being outside GST value chain, refineries and oil marketing companies will not be able to claim credit for taxes paid on raw materials and other inputs.
Since, POL and natural gas are used in almost every segment of industry, business and services – akin to blood running through all parts of human body – excluding these from purview of GST is a dangerous idea. Such exclusion will completely obliterate the value chain and knock at its very foundation/raison de atre viz., reducing the cascading effect of taxes and duties.
The government intends to include these products in future on a date to be determined by GST council. The decisions in the Council will be taken with three-fourth of the weighted votes of the members present and voting. Union government will have one-third of the weight in the votes and each state has equal vote in the remaining two-thirds. Considering that states have a vested interest in continuing with their present high revenue from these products, they will never vote for bringing these under GST.
The Bill proposes to levy an additional tax of not exceeding 1% on supply of goods in the course of inter-state trade, to be levied and collected by central government and distributed to the state of origin. This levy will continue for 2 years or such other period as the GST Council may recommend. This tantamount to re-introducing CST through the back door. The new levy being on supply of both goods and services makes the situation even worse when compared to CST which is only on goods.
This being an ‘origin-based’ levy for which no set-off (hence, no freedom from cascading effect) would be available, is in serious contravention of the ‘consumption-based’ principle and concomitant freedom from cascading effect underlying GST. Further, any hope that this tax will go after 2 years also fades in view of a caveat ‘or such other period as the GST Council may recommend’.
The states have also managed to keep a GST threshold [level below which a business will be exempt from levy of GST] at Rs 1 million as against Rs 2.5 million proposed by centre. This smacks of an antiquated mindset to bring as many traders within tax net no matter how small is turnover. Rs 1 million or over Rs 80,000/- per month is too small an amount to deserve levy of tax. The extra revenue collection by bringing traders in Rs 1 – 2.5 million range won’t justify expansion of tax collection machinery and attendant cost.
In a bid to apply some balm, government has proposed concessional GST rate for those with turnover in Rs 1 – 5 million band. As regard the concessional rate, the same will be decided by the GST Council. This represents a typical scenario of first creating an avoidable mess and then, coming up with remedies that will only compound the mess. Just look at the number of trader categories viz., less than Rs 1 million for all states other than north-east; less than Rs 0.5 million applicable to north-east and Rs 1 – 5 million, a group of preferred traders and administrative complexities this will lead to.
Given that 80-90% of the revenue originates from a limited number of leading assesses with annual turnover exceeding Rs 2.5 million, it will be prudent to keep threshold at this level and galvanize the administrative machinery to maximize collections from every one having turnover in excess of this value. However, traders below this must be registered and monitored so that on crossing the threshold, they are captured in the tax net.
The Bill merely provides a framework for GST. The structure, its operation, the exemptions, rate structure and thresholds will be determined by the GST Council. The possibility of more flaws surfacing at the time of determination is not ruled out. Further, in view of decisions having to be taken by ¾ majority of weighted votes in the Council, a situation of logjam is not unlikely.
An ideal GST dispensation is stuck in grooves primarily because of the intransigence of states (Tamil Nadu is opposed to even the basic framework). Even as Union government has gone whole hog to accommodate their concerns, they refuse to reciprocate. Major flaws creeping in the bill are an outcome of their heightened stubborn attitude.
Considering Modiji’s commitment to cooperative federalism, he will be able to deliver only what states want. They need to be ‘reasonable’ and ‘pragmatic’ in their approach and clear the way for an ideal GST regime that subsumes taxes on all products from day one, says good bye to origin-based tax, keeps GST of no more than 20% and threshold of no less than Rs 2.5 million.