The Constitutional amendment Bill on Goods and Services Tax (GST) was passed by Lok Sabha on May 6, 2015. But, its passage in
Rajya Sabha – where the ruling NDA [National Democratic Alliance] is in minority – was stuck due to opposition by Congress and other parties. The bill is being taken up for consideration during the current [winter] session.
Congress had agreed to support the bill subject to government agreeing to three key changes. These include (i) no levy of additional 1% tax on supply of goods in the course of inter-state trade [collected by central government and distributed to state of origin]; (ii) bringing crude oil, petroleum products [POL] and natural gas within ambit of GST and (iii) fixing revenue neutral rate [RNR] of no more than 18%.
The additional 1% tax on inter-state supply is out of sync with GST which is a consumption-based tax. The centre had agreed to keep it for a short period to accommodate concerns of producing states like Gujarat, Maharashtra and Tamil Nadu etc who feared huge loss of revenue under GST. However, this was on a clear understanding that it would be withdrawn after 2 years or before, based on recommendation of GST Council.
As regards bringing crude, POL and gas under GST, here again, Union government had to respond to sensitivities of states by letting them continue with taxing these as they do now in view of their revenue potential. Yet, it decided to include these products in GST framework with “zero rate” to ensure an un-interrupted value chain and enable smooth switch over to tax collection under GST dispensation at an early future date.
On (i) and (ii) therefore, there is no disagreement in-principle. The states were only looking for a temporary relief. They can be persuaded to forego even this, if central government agrees to compensate them for loss of revenue @100% for all the 5 years – as against an agreed plan of compensation @100% in first three years @75% in 4th year and @50% in the 5th year.
As regards RNR, a study by National Institute of Public Finance and Policy [NIPFP] had come out with an exceptionally high figure around 27% which generated a bit of scare. However, in view of a committee under chief economic advisor, Arvind Subramanian now recommending tax @18% and government likely to accept it, this suggestion has also been accommodated.
But, lately Congress has fired another salvo. It has now forwarded three more ideas which Modi – dispensation will find it impossible to accommodate. First, it wants that the GST rate must be included in the Constitutional amendment Bill” instead of leaving it to the GST council as envisaged.
The right rate at any point of time depends on how the trade and commerce evolves, number of entities coming under tax network, revenue generation and pace of economic growth. Consequently, there has to be room for some flexibility which is possible only if a decision in this regard comes within the remit of GST council. On the other hand, if a rate say, 18% is mentioned in the Constitution amendment Act, the consequences would be grave.
Thus, even when underlying economic circumstances necessitate a revision and there is consensus among all states and the centre to bring about the intended change, the government will have to go through another round of constitution amendment which is not so easy to come. And even if it is feasible, this will be time consuming as in addition to approval by both houses of parliament, 15 state assemblies need to approve it.
One would never know as to how many times a change in the rate is required. If it happens to be frequent [this possibility cannot be ruled out], then we will have to think of as many Constitution amendments leading to an impossible scenario! No wonder, Jaitely has described the suggestion as ‘preposterous’ and has rightly observed that “it would be extremely unfair to the country if we try to impose in the name of political compromise, a GST with a defective architecture”.
The second suggestion relates to the dispute resolution mechanism [DRM] and is equally bizarre. As per the bill, the decisions will be taken with three-fourth of the weighted votes of the members present and voting. While, Union government has one-third of the weight in the votes, each state has equal vote in the remaining two-thirds. Now, the Congress proposal is to reduce the weight of centre to one-fourth and correspondingly increase weight of states to three-fourth.
This would imply that all decisions relating to taxation policy, tax structure, rates and all matters relating to implementation can be taken by states reducing the Union government to a non-entity [to use Jaitely’s phraseology, ‘union of states will cease to exist’]. It will lead to an obnoxious scenario whereby a decision on even CGST [central goods and services tax] – a levy that comes entirely under jurisdiction of the centre – will be taken by states.
Third, the party suggests creation of a forum where judges will decide on these issues. This again is bewildering. The tax policy is an area that lies strictly within the jurisdiction of the parliament and state legislatures. How could one ever think of transferring this power to the judiciary? The proposal is not only patently unjust and illogical but also strikes at the very structure of the constitution.
The three ideas coming as bolt from the blue [these were not there even in the bill prepared by UPA – dispensation] are without doubt prompted by political considerations and are far from being “bonafide concern” as claimed by Congress. The sole intent behind putting these on the table is to put a spanner in the works at a time when all political parties have agreed to extend their support to the bill.
While, there is no question of Modi – government buckling under pressure on these ‘preposterous’ suggestions and since Congress holds the key to getting this bill through in Rajya Sabha [2/3rd majority is needed for its passage], one can only wait and see whether it will let this revolutionary tax reform – the first of its kind in Independent India – happen.