Based on what happened at finance minister Arun Jaitley’s meeting with state finance ministers on Tuesday, it would appear there is a very good chance the Constitutional Amendment Bill for GST will sail through in the Rajya Sabha next week. Though some media reports suggest a problem with the state finance ministers rejecting the revenue neutral rate (RNR) suggested by chief economic advisor Arvind Subramanian, this misses the point as FE has reported on page 1 today. Given the large difference between the RNR recommended by Subramanian and the actual rate of taxation being faced by consumers today, the state finance ministers were not convinced that the RNR would be high enough to ensure they did not suffer any serious loss of revenue in the long run—the Centre will compensate them for five years, but what after that? In the event, what the finance ministers have suggested is a two-point principle—the rate shouldn’t be so high as to hurt the common man and it mustn’t be so low as to hurt their revenue buoyancy—which needs to be accepted, and once this is done, the actual rate can be adjusted by the GST Council.
That seems a fair enough suggestion, though it has to be pointed out that the reason why the Subramanian RNR is much lower than what consumers pay today is precisely because he assumes a higher tax compliance, and therefore buoyancy, once the system is in place—once the GST network is capturing all transactions made along the value-chain, this will ensure that a large number of players who either do not pay or underpay their taxes will have no option but to pay the full value. That, of course, is the theoretical under-pinning, the state finance ministers fear the reality may not match up to it. That is why, as the government has been pointing out, putting in a cap on the RNR into the Constitutional Amendment Bill is a bad idea. Leaving the exact rate-setting to the GST Council is a much better idea since this allows a more democratic system of fixing the rates depending upon the particular economic circumstances. Of course, changing the rates every year is not an option that should be tried since a good tax system needs to have stable and predictable rates. The good thing about having a five-year window in which the Centre will fully compensate the states for potential losses is that this gives enough time in which a final tax rate/band can be fixed.
Though GST is a game-changer, it has to be kept in mind that realising the gains is going to take several years. The biggest gain, from a lower tax rate, can only come about when the system captures all transactions—that, in turn, needs all goods and services to be under the ambit of the GST. It is only when the GST network is working well and capturing all transactions that states can afford to stop checking goods at their borders—the stopping of trucks carrying goods at various inter-state borders is the most obvious sign that India is not a seamless market today, which is what the GST hopes to fix. Doing all of this will take time, but hopefully the first big step will be taken next week.