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  1. Column: Breaking the GST impasse

Column: Breaking the GST impasse

Leave the proposed tax regime’s final design to the GST Council, not the GST Bill

By: | Published: September 2, 2015 12:48 AM

The GST debacle in the Rajya Sabha is unfortunate. India badly needs GST to revive its economy and to simplify and rationalise the complex structure of taxes at the Centre and state levels. Never before, in fiscal history, has there been such a clamour for a tax reform of this nature. All segments of the business community, consumers and other stakeholders are eagerly awaiting this reform. While they may not know how GST will impact their lives, their enthusiasm for it is indicative of the frustration and dissatisfaction with the current regime.

Inspite of eight years of debate, our political masters have not been able to go past the starting line. Frustrated by the long delay, some have given up the hope of an ideal reform and are prepared for the second-best. “Let not the best be the enemy of the good” is a common refrain for them. Yet, there are others who feel that the GST as envisaged in the Constitution (Amendment) Bill will amount to continuation of the status quo. It could be a short-term gain, but definitely a long-term pain. Given the situation, finance minister Arun Jaitley faces a dilemma about how to go forward with this initiative.

In developing the way forward, let’s consider the following issues:

The Bill placed before Parliament is only the first step in the long road ahead for the GST implementation. Its purpose is simply to empower the governments to levy the GST, which they cannot do under the existing Constitution provisions. The Bill does not levy the tax, which would require a separate law to be enacted by the Centre and each of the state legislatures. There is unanimous support for the levy of GST, but the Bill is embroiled in controversy because it goes beyond just empowering the governments to levy the tax. It exempts a range of goods and services (e.g., alcohol, petroleum, electricity, and real property) from the application of GST. Such exemptions are absurd and serve no social or economic purpose.

These exemptions are massive and will adversely impact all sectors of the economy. They will perpetuate tax-cascading which hurts investments and discourages the Make-in-India initiative. While the government has not provided any impact analysis of the exemptions, our own estimates suggest that they can completely negate the GST benefit of 2% boost to GDP. They reduce the GST from being the Crown Jewel of India’s growth story to being a lump of coal.

Industry is opposed to such exclusions and is demanding that the Bill should impose no such constraints on the design of the tax. They detract from the ‘goodness’ and ‘simplicity’ of GST and change its ranking from one of the best to one of the worst in the world. India’s world ranking for ease of doing business is a dismal 142 out of 189 economies. This GST would fare no better.

Even if such exemptions are to be provided for reasons of political exigencies, they should be provided in the GST law, and not enshrined in the Constitution. Most of such design features are already delegated to the GST Council, a body comprising the finance ministers of the Union and the states. In hindsight, had the government chosen to delegate all design features to the Council, the passage of the Bill would have been completely non-controversial ab initio.

Fearing that the truncated GST would necessitate inordinately high tax rates, which in turn would detract from voluntary compliance, the Opposition parties have rightfully demanded that the GST rate be capped at 18%. This again is a design feature of GST which should not be enshrined in the Constitution. The need for revenues and the level of tax rates for different products and services will evolve over time and specifying these in the Constitution is conceptually inappropriate.

Another major area of controversy is the additional 1% tax on interstate supply of goods. Application of this tax on origin basis is completely contrary to the destination principle of GST. It goes against the principle objective of making India a common market. It was introduced in response to the demands of the producing states (Gujarat, in particular) to compensate them for the loss in revenues from the central sales tax (CST). This tax, which has been condemned universally by all business groups, is superfluous given that the Centre has already agreed to fully compensate the States for any revenue losses. Moreover, the Constitution already contains provisions empowering the Centre to levy such a tax and no amendment is needed in the Constitution to permit the levy of this tax.

Thus, to make the Constitution Bill non-controversial, all such add-on design features should be dropped from the Bill and appropriately left to the discretion of the GST Council. The Constitution should simply enable the governments to levy a GST, whether good, better or the best. As we learnt in the grade school, “Good, better, best, never let it rest, till your good is better, and your better is best.”

If the GST Council does opt for an imperfect GST, future generations and governments will have the option of reversing the choice over time. Given the dismal experience of amending the Constitution over the past eight years, we should not shackle the Indian economy with imperfections of GST for an indefinite period.

Shalini Mathur, director, tax & regulatory services, EY, contributed to the article

The author is tax policy advisor, EY. Views are personal

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