Has the Prime Minister done a world of good to the efforts to introduce a countrywide Goods and Services Tax (GST) by spilling the beans on what has held it back? Since Manmohan Singh never speaks without departing from the script, one can be absolutely sure, the quip blaming the BJP was discussed threadbare with finance minister Pranab Mukherjee, the shrewdest political mind in this Cabinet.
Mukherjee and Singh had concluded, the only way to break the logjam was to talk about it. Note, the question that led to Singh speaking about how the BJP was asking for a quid pro quo to allow the GST to sail through, was broader. Singh used the occasion to dive into the revelation.
Singh?s government has obviously concluded that dialogue with the recalcitrant states has reached a dead end. The problem is with the solution he and Mukherjee seem to have in mind. If Wednesday?s comments are credible, the Prime Minister feels the heat will now be on the BJP to let the states run by it to okay GST for adoption by April 2012. Both of them feel the Centre has done as much as it could offer to bring the states (10 of whom are still holding out, as per a finance ministry release) to accept the switch to the new regime.
Just days earlier, Mukherjee told a meeting of the state finance ministers that since the GST plan has won the approval of the necessary two-thirds of state governments, moving a constitutional amendment was now his right. He did use the word ?right?, instead of noting a broad-based support. Moving the amendment, according to him, to quote a ministry release, was the ?prerogative of the Executive, in this case, the Government of India?. He went on to say it is also Parliament?s prerogative to either decide in favour of its approval or its rejection. The rejection could well happen as the UPA government does not have a majority in Rajya Sabha. We are obviously far away from a nationwide consensus for this key reform measure.
This means Mukherjee could very well miss the April 2012 deadline he has committed himself to roll out the tax. The delay will also disappoint industry, which has projected the introduction of the tax along with the Direct Taxes Code (DTC) as the biggest fiscal reform measure that India will undertake for a long time to come. Major companies planning their investment programmes have done so on the presumption that GST along with DTC will be in place by next year. Of course, the rates will not be the grand bargain plan the 13th Finance Commission had suggested. Instead, the combined central and state rates of tax for goods will be 20% and for service at 16%.
Missing the deadline, however, seems to be a big possibility now. The Centre has just this year to steer the constitutional amendment through Parliament that will change the structure of taxation rights between the Centre and states.
Then the amendments will have to travel through the state legislatures with two-thirds of them approving it. While Mukherjee is right that 16 states are on board, and so hopefully will clear the Bill through their legislatures, it takes time. But if major industrial states like Gujarat and Karnataka stay away from GST, the impact of the reform will be shattered. In the initial years, states like UP and even Tamil Nadu stayed away from VAT to join later, but a GST regime just cannot run unless the leading states are all on board.
The opposition by the 10 states, most of them ruled by the BJP, is based on surrender of their fiscal sovereignty. They have a valid concern. Non-tax revenue for them is controlled by the Centre. With GST, more of their fiscal autonomy (up to 70% of the own tax revenue of the states is accounted for by excise now) will slip out of their domain. Meanwhile, the finance ministry concedes that compensation for phase-out of central sales tax, even for 2008-09, has not been paid in full to the state governments. For fiscal 2010-11, the compensation paid so far is ad hoc. Niggling issues like a pan-national IT structure that can handle each state?s tax administration can of course be corrected soon. But overall, is the finance ministry at the Centre taking on far more than it can handle and is it good for the country?
subhomoy.bhattacharjee@expressindia.com