All that the ill-conceived 1% additional levy will do is encourage misbehaviour.
Rather than viewing the Rajya Sabha select committee report on the GST (goods and services tax)—to be submitted later this week—as one more roadblock, the government would do well to look at it as an opportunity to fix obvious flaws in the Bill. The GST Bill, as of now, is badly designed, what with an additional 1% inter-state levy for which there are no set-offs and a host of key sectors that have been excluded. While the select committee hasn’t called for the withdrawal of the levy, one of its suggestions could help the government; it has said that states should be compensated for any loss in revenues for a full five years. The Constitutional Amendment Bill, passed in the Lok Sabha in the Budget session, had provided for full compensation in the first three years but only 75% and 50% in the fourth and fifth years, respectively. The government must use this as a bargaining tool to ask the producing states—especially Gujarat and Maharashtra—to stop clamouring for the 1% levy.
In the first place, it has never been clear why the BJP-led NDA wasn’t able to convince these states that the extra 1% levy is a very bad idea because of the cascading impact it would have on prices; indeed, it is hard to believe the PM couldn’t persuade them not to press for this given several large states are ruled by the BJP. Nevertheless, it is time to tell them where to get off. While the select committee has said inter-branch transfers would be exempted from the 1% levy, and while this could be a mitigating factor, it is better if it is not imposed at all because it could turn out to be a big disruptor.
Funnily enough, that is what the Congress Party also believes, a view that should make it easier for the government to take it off the table altogether. In the process, it could also score a few brownie points with the Opposition and get the Constitutional Amendment Bill passed in Rajya Sabha—where the NDA doesn’t have a majority. One could argue the Congress is being more reasonable, or wants to come across as such, because the stakes for it are smaller, but the BJP should cash in on it.
The government also needs to fix the revenue neutral rate (RNR) at somewhere closer to 20%, and not at the elevated 26-27% that the states want; while tax experts claim it is possible to have an RNR of 16-17%, that may be hard to pull off. Even at 20%, the hike in the case of services will be a huge 6% and could hurt demand; the panel headed by Arvind Subramanian, chief economic advisor, tasked with coming up with an RNR would surely keep this in mind.
In fact, it is surprising corporate India has been mum on the way the plot is unravelling. For whatever reason—probably the fear of being upbraided by the government—industry is playing it politically correct by not pointing out any of the problems, but staying with the safe “step in the right direction” kind of statements.
In fact, there has been little comment on how the architecture of the GST is already flawed, thanks to the exclusion of sectors like petroleum, electricity, potable alcohol and real estate from the ambit of the legislation, which leaves it far from being seamless. The exclusion, experts estimate, could completely wipe off the 1-2% boost the tax is expected to give the GDP. It is true things could sort themselves out in the long run and maybe it is a good idea to get GST off the ground first but, as tax expert Satya Poddar has been warning us, rolling out the GST without fixing its flaws could be retrograde. In fact, it is somewhat surprising the government hasn’t nipped this in the bud because such a levy would only hurt local manufacturing given it won’t be levied on imports.
With all the noise about Make-in-India, it is perplexing the government hasn’t taken a firmer stand; in fact, if manufacturing is to get a leg up, it is important that GST works—and it can hardly be effective if it is not well-designed. All that an ill-conceived levy like the one being proposed will do is encourage misbehaviour; companies will try to lower the tax bill by under-valuing the goods produced (since it is an origin-based tax) and claiming huge value-addition in the destination state. At a time when the government is trying to clean up the environment, such practices are hardly desirable.