BJP has all the ammunition to pass the GST Bill—most importantly, a revenue neutral GST rate of 11%
There is a whiff of optimism in the air regarding the passage of the Goods & Services Tax (GST) Bill during the ongoing session of Parliament. We all wait for the Congress Party to stop copying the BJP to the last drop of nonsense (“BJP prevented Parliament from functioning for six sessions; give us a chance, we are only at number two!”). If Parliament is not open for business, then the GST Bill cannot be passed. But what the Congress may not realise, or more accurately, is not willing to admit publicly, is that the BJP holds all the cards with respect to the GST Bill. Let us explain.
While the Bill was passed in the Lok Sabha in the previous session, it did not get voted on in the Rajya Sabha (RS) due to the insistence of further legislative scrutiny of the Bill by the Congress-led Opposition—a scrutiny that has been going on for the better part of 7 years. In order to “mediate” these demands, a RS select committee was formed (RSSC) for all the parties to come to a consensus. The RSSC presented its recommendations on July 22. However, there were three dissent notes—by the Congress, the AIADMK and the Left parties. This implies that out of 245 members in the RS, 89 “seats” opposed the existing form of the Bill (Congress – 68; AIADMK – 11 and Left – 10). Together, these parties make up for a little more than a third of the seats in the RS. And as the Bill requires a two-third majority for getting passed in Rajya Sabha, getting some of them on board is necessary.
Meanwhile, BJP’s Cabinet Committee approved most of the contentious recommendations of the RSSC within a week of its submission. Three important recommendations that were accepted: First, compensating state revenues for any shortfall due to GST for the next 5 years; second, reducing the scope of the 1% additional tax on inter-state supplies to only apply to “all forms of supply made for a consideration”, i.e., on actual sales and not on inter-company stock or inventory transfer; and third, agreeing that a ‘band’ tax rate would be finalised for the GST while framing the rules.
While the quick approval of these recommendations ensures that other parties are now on board with the Bill, the dissenting parties (Congress, AIADMK and the Left) still have to be convinced. However, we feel that, to a very large extent, most of the demands set forth in the dissent notes have been met. The main dissent of the all three parties was that there is “a need for decentralisation of powers and devolution of the taxes in favour of the states”. The demand is that the Centre have only a 25 % representation in the GST Council rather than 33%. Much ado about nothing?
The AIADMK had three additional unmet demands: that petroleum products be kept out of GST indefinitely (already out for at least the next 3 years); that the states be allowed to impose higher taxes on tobacco products (implicitly agreed to); and additional retention of revenue from the central GST for compensation on inter-state transfer of goods and services. This dissent has been made irrelevant as full compensation is being provided to the states for the next 5 years for any revenue loss.
What remains is the dissent of the Congress party. They had three minor pieces of dissent: greater representation of panchayats and special consideration to Union Territories with population less than 2 million population; and inclusion of tobacco, alcohol and electricity in GST within 5 years.
Three major Congress objections: First, that the definition of ‘supply’ in the 1% additional tax on the “supply” of goods needs to be clarified (more or less met because of the above-mentioned modification to the flat 1% tax).
Second, states should be compensated for revenue loss for 3 years—this has been agreed to and extended to 5 years!
The third and most significant point of dissent for the Congress is with respect to the GST rate—the Congress demands that this rate be no more than 18 %. We wonder if the Congress is aware of the following. A GST task force, set up in 2009 by the Congress party, came to the conclusion that a revenue neutral rate (the rate at which the new central GST and state GST tax rates yield the same revenue as the old order) was 12%—5% for the central GST and 7% for the state GST (Arbind Modi, Chairman of the Task Force on Goods & Services Tax, Thirteenth Finance Commission, December 15, 2009). The task force used five different methods to arrive at the all-important tax base; its study was based on 2007-08 income tax returns for more than 2.85 million firms.
Some broad statistics suggest that the Arbind Modi report may have the numbers right. First, only two-thirds of actual GDP forms the tax base, i.e., almost 33 % of GDP is excluded from tax considerations. This exclusion is for value-added items which will not be subject to GST—health, education and unprocessed food articles. In addition, this 33 % includes non-compliance as well. The safe assumption is that if you have a turnover of at least Rs 1 crore (96% of the firms considered), you should be in the tax net—if you are not, it is because of non-compliance.
These data can be used to project tax-revenue in 2015-16 if the GST were already in place. In 2014-15 collection of taxes (Centre and state) which come under the GST umbrella was approximately 9.1% of the GDP: Central excise tax – 1.5%, state sales tax – 4%, central service tax – 1.3% and other taxes – 2.3%. If so-called sin tax revenues (petroleum, alcohol and tobacco), accounting for approximately 1.6 % of the GDP, are excluded, then the GST should collect 7.5 % of the GDP.
Given that the tax base is 67% of the GDP, the revenue generated at different tax rates on this tax base can easily be computed. For example, if there was an 11% tax rate, then the tax collected will be (0.11*0.67*GDP) or 7.4 % of GDP in 2015-16. This is indeed Arbind Modi’s revenue neutral rate. With a 14 % GST tax rate, revenue will be approximately 9.4 % of GDP, or 2 percentage points of GDP more than the revenue neutral tax rate!
This is the ammunition that BJP has. It can go to the people, and to Congress, and say that all the GST demands are met—and then some. It can also, in a spirit of common sense, completely abolish the 1% “surcharge”. As Gujarat, under then chief minister Modi, was supportive of this tax, this will be a doubly welcome gesture.
Given that demands of all the dissenters have been met, the Congress will find it very difficult to not allow Parliament to function, and not to pass the GST legislation. If it continues to object, it will be exposed to be transparently political, and at a minimum, intellectually dishonest. And, of course, prove that they are the most classic anti-poor party (but always whining about the poor). In their dissent note, Congress’s first demand was that “GST rates are moderate and reasonable and do not impose an unfair burden on consumers, particularly poor consumers”. Will Congress walk its talk?
Bhalla is chairman, Oxus Investments and senior India analyst for Observatory Group, a New York-based macroeconomic policy advisory firm. Ramakrishnan is an economist at Oxus Investments