Column: Putting GST back on track

Written by Mahesh C Purohit | Updated: Jun 25 2014, 07:38am hrs
As per the commitment in its manifesto, the Narendra Modi government is renewing attempts to push forward a key tax reformthe introduction of the Goods and Services Tax (GST). It is trying to bring on board all the states and is striving to address the concerns of each of the states. In this endeavour, the minister of state for finance at the Centre has already discussed the issues involved with the Gujarat finance minister. The Union finance minister proposes to soon discuss the issues with the Empowered Committee (EC).

The Modi government intends to bring in this reform at the earliest because the new tax will not only help remove the cascading of the two VATs (state and Centre) and service tax but will also not entail any tax export through the replacement of central sales tax by the destination-based integrated GST (IGST). It will also reduce production and transactions cost of business and usher in competitive efficiency.

The main agenda for the finance minister would, therefore, be to bring back GST from the zone of despair to hope. It must be asserted that the introduction of GST would not be allowed to affect the finances and the fiscal autonomy of the states. In this context, the Modi government should take note of the following issues.

CST compensation

It is essential that the finance minister instils confidence in the minds of the states that the commitment made by the Union government would always be respected. Such an assertion is important as P Chidambaram, during the regime of the UPA-2, had announced at the conclusion of the Bhubaneswar meeting of the EC that the central government would fully compensate the states for phasing out CST (100%, 75% and 50% compensation for FY11, FY12 and FY13, respectively); this compensation would give the states Rs 34,000 crore. The then finance minister had set in motion the process by providing for R9,300 crore as the first instalment of the compensation in the Union Budget 2013 but for some reason only R1,940 crore was finally released. To instil confidence in the states regarding these assertions of the central government, the new government needs to provide for the CST compensation in the forthcoming Budget.

Design of GST

Consensus needs to be built over the design of GST, taking into account the political economy of a democratic country like India and the autonomy of its states. The broad contours of the design should be such that there is one standard rate, and two other rates (one low rate and another high rate) on necessities and on demerit goods, respectively. It is useful to note that it is not feasible to keep a single rate in a large country such as India where a huge majority of people live below the poverty line. Unlike Canada, where a cheque for refund is given by the Income-Tax Department for the GST paid by the poor citizens in the country, it is not administratively feasible to adopt such a practice in India keeping in view the objective to introduce equity in the tax system. Also, it may not be politically feasible to have a very high rate on necessities.

With regard to the views of the states to exclude petroleum products from the coverage of GST, the Centre needs to hammer in two points. First, there is a need to make the states understand that it would be to their advantage to not exclude petroleum products even if the GST is not presently levied on these items. Excluding these items from the definition and coverage of GST in the Constitutional Amendment Bill will not provide any flexibility to levy GST on these items in the future when the states may desire to do so. It would require another Constitutional Amendment to enable them to levy GST on these items. What is to be taxed or not taxed or what should be the coverage of the GST should be left to the EC or to the proposed GST Council. The Centre could involve some academic think-tank to make a presentation before the EC highlighting the pros and cons of including this in the definition of GST even if it is not listed in the present levy of GST. Second, this has to go hand-in-hand with an undertaking from the Centre that the GST would not be levied on these items unless the same is cleared by the EC.

Drafting the law

The new government has to table a revised Constitutional Amendment Bill in Parliament as the earlier one lapsed with the dissolution of the previous Lok Sabha. It is pertinent to note that prior to the introduction of the lapsed Bill, three drafts were scrutinised by the EC. These had been sent by the Union government to three different meetings of the EC, of which two were held in August-October 2010 and one was held later in February 2011. The states had some serious objections on the provisions of the Bill.

One, the proposed amendment to the Constitution envisaged the setting up of a GST Council to make recommendations on issues like rates of tax, exemptions and threshold limits. The Bill empowered the President to set up the Council with the Union finance minister as the chairperson, and the Union minister of state for revenue and finance ministers of all the states as its members. The states, however, felt that they should have equal authority with regard to all the aspects related to the Council. Keeping in mind these objections raised by the states, the new government should propose to constitute the GST Council, on the pattern of the present EC which has had an excellent track record of reforming the tax system for more than a decade. Accordingly, the proposed Council should comprise of the Union finance minister and the finance ministers of all the states and the Union Territories as its members. The revenue interest of the Centre would automatically be taken care of due to the fact that any change would affect the Centre and the states in a similar fashion.

Two, the Bill provided for the setting up of a GST Dispute Settlement Authority with a chairperson and two members to resolve disputes between the Centre and the state governments arising due to deviations from the recommendations of the GST Council. The states had serious concern about the need for having such a body. Accordingly, a consensus was reached at the Bhubaneswar meeting of the EC to do away with the new GST Dispute Settlement Authority. However, it would be in tune with the spirit of cooperative federalism if the proposed GST Council is also constituted on the pattern of the present EC. However, unlike the present EC, which is a society registered under the Societies Registration Act, the Council should be a Constitutional Body and also a defined regulatory authority vested with strict punitive powers.

By implementing these suggested measures, the new government will find it possible to bring all states on board to introduce GST in the near future by ensuring the removal of all the bumps and road blocks in the path of its introduction.

The author is former member-secretary of the Empowered Committee of State Finance Ministers for the Reform of Sales Tax, and currently director, Foundation for Public Economics and Policy Research, New Delhi