scorecardresearch

Fewer GST slabs or single rate won’t be equitable: T M Thomas Isaac

States need to be given the right to modify S-GST within a narrow band, it is within their leglslative competence to revise rates if such steps don’t affect inter-state trade or Central GST, writes T M Thomas Isaac, former Kerala FM

However, many ad hoc changes in the rates like virtual elimination of the 28% tax slab and reduction in the rates of large number of commodities followed, in the context of 2019 elections.
However, many ad hoc changes in the rates like virtual elimination of the 28% tax slab and reduction in the rates of large number of commodities followed, in the context of 2019 elections.

By T M Thomas Isaac

The experience of GST during the past 5 years have been far below the great expectations with which it was ushered in, particularly, from the point of view of the states. Many teething problems with respect to small traders and manufacturers as well as many procedural issues have been sorted out in course of time. But the states lost not only their fiscal autonomy in resource mobilization but also the buoyancy of their revenue. The states would have been in dire fiscal crisis had it not been for the Compensation Scheme that guaranteed 14% annual growth of GST revenues. Now that the compensation period is coming to an end most of the states are facing the possibility of a precipitous fall in their revenue receipts from the current year.

The GST Council after prolonged deliberations extending over a year had drawn up a GST rate structure that was revenue-neutral. However, many ad hoc changes in the rates like virtual elimination of the 28% tax slab and reduction in the rates of large number of commodities followed, in the context of 2019 elections.

The normal procedure of detailed examination of Fitment Committee of the revenue implications and inverted rate structure was not available for most of these decisions. On the eve of the elections, it would have been very difficult for any of the ministers to oppose reduction in tax rates. These reductions were primarily responsible for rendering the rates non-revenue neutral. Besides, there were serious lapses in the tax administrations: For 4 years the IT backbone was not fully in place and for 2 years, e-invoicing was not fully operational.

With the Covid-19, the GST collections came down drastically and the Compensation Fund proved to be insufficient to meet the revenue short falls. The compensation payments were delayed and were in arrears. The simple solution would have been to borrow required funds and compensate the states as promised. The Council was empowered to extend the collection of Compensation Cess until the loans taken were repaid. This indeed was the solemn promise made in the Council by the former Union Finance Minister, Arun Jaitely, in case of any unlikely eventuality of shortfall of resources to pay the compensation.

Instead of keeping the promise, which would have been a perfectly rational economic option in a recession period, totally unwarranted objections were raised. Consequent bitter altercations created an environment of mutual distrust in the Council. It failed to meet more than 6 months at a stretch in 2021. And when it met some veterans of the Council openly complained of the undemocratic manner that the business was being transacted. The discussions degenerated to party alignments. A former Union Finance Minister who always have been positive towards GST, expressed the fear that time might come to script an elegy for Indian GST.

It is in this context that the recent observations of Supreme Court on fiscal federalism become relevant. The court observed that GST does not abridge the supremacy of legislative bodies. The Council is only a recommendatory body. Both parliament and state assemblies have simultaneous powers to legislates on GST as there is no repugnancy clause in the constitutional amendment. According to SC, Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation.

The verdict is in no way the end of the road for GST. The states do not have constitutional powers to impose any new indirect taxes, but it is within their legislative competence to modify the GST rates and procedures if they do not affect inter-state trade or Central GST. And the functioning of the Council would have to be made more democratic.

The 5th anniversary is an appropriate occasion for dialogue on several issues on GST in the true spirit of cooperative federalism. To make it possible the Union government should agree to extend the GST Compensation period so that disruption of the state finances is averted. It will also provide sufficient time for deliberation on the several key issues including rate revision.

The most important issue to be considered is whether the states can have the right to modify State GST rates. GST can be viewed as extension of VAT principle to the national scale. Though VAT had introduced uniform tax rates throughout India, in practice, there existed minor variations between states. It was the general understanding during the early discussions of GST at the Empowered Committee of State Finance Ministers that this flexibility would be carried into the GST.

The states need to be given right to modify the SGST within the narrow band to introduce some level of federal flexibility. Such a flexibility would not adversely affect the functioning of National GST ie. Central GST and Integrated GST on interstate trade. The tax would remain perfectly vatable, or, in other words, there would not be any hindrance to the input credit chain across the nation. We have a concrete experience of Kerala flood cess of 1% on SGST after the Great Flood.

The current corporate led clamor for merging the present GST slabs into a smaller number, if not one single rate, ignores the poverty and inequality that characterise our society. The rates on consumer durables and urban consumer products were the ones which saw the sharpest decline with introduction of GST. It is these same products which would further gain if the demand for a ceiling rate of 18% is accepted. Raising the rates in the lowest band is also being discussed. Such a rationalization of tax would remove even the semblance of progressivity in GST. The ideal of equity should be considered at least as important as the ease of doing business. Excess simplification is the antithetical to fairness.

(The author is former finance minister of Kerala)

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Most Read In Economy