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Sunday, September 20, 2020

Explained Ideas: Why saving the GST, one of Arun Jaitley’s key reforms, is crucial for the economy

Today the GST Council is riven by a trust-deficit and the GST is on the verge of becoming discredited, writes Arvind Subramanian

By: Explained Desk | New Delhi | Updated: August 24, 2020 9:08:01 am
The integrity of reforms like the GST is tested in difficult times such as now. And to pass the test, the Centre will have to incur costs. (File)

It has been a year since the death of Arun Jaitley, the former finance minister, who championed such policy reforms as the Goods and Services Tax regime and the Insolvency and Bankruptcy Code. But, as Arvind Subramanian, professor, Ashoka University, and former chief economic adviser, Government of India, recalls, “as Jaitley’s health and influence declined, the reforms that he spearheaded began to falter”.

“Today, the GST Council is riven by a trust-deficit, the GST is on the verge of becoming discredited, while the IBC has been consigned to some netherland of zombiedom,” says Subramanian. Even so, the decline is not terminal and the GST and IBC can yet be resuscitated.

For the GST, the immediate priority is to rescue the compensation discussions, which have become trapped in obscure legalities. This is a distraction because the spirit of the compensation commitment was clear: The Centre guaranteed states annual revenue increases of 14 per cent. It is up to the Centre to will the means, and resist recourse to legal legerdemain to avoid or delay compensation. The integrity of reforms like the GST is tested in difficult times such as now. And to pass the test, the Centre will have to incur costs.

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“This is counterfactual speculation but had Jaitley been alive, he may have been able to preserve enough trust to persuade the states to accept a lower compensation this year, in view of the parlous state of revenues all around,” writes Subramanian.

But now states will not engage in that discussion, fearing that compensation might be diluted even beyond the crisis. If this stalemate continues, each revenue-starved state could start to impose its own GST rates, beginning as a trickle and soon leading to the flood that results in many taxes and several balkanised markets, undermining the dream of one economic India.

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“At that point the GST would be dead. Such an outcome is too horrible to contemplate; it must be avoided at all costs,” warns Subramanian.

“The other major GST reform would be to simplify the rate structure along the lines I had originally proposed: Three rates with no cesses,” he states. The system has paid the price of proliferating rates and cesses and arbitrary and irresponsible rate cuts in 2018-19. If that persists, the GST will be consumed by its own complexity.

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