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In fact: On the GST, why the Congress thaw, and what next?

A former president of the Confederation of Indian Industry (CII) who had met him to convince him on GST, says Modi instinctively knew the benefits of the tax, but obstructed it for political reasons.

Written by P Vaidyanathan Iyer |
Updated: July 12, 2016 5:50:00 am
gst bill, goods and service tax bill, congress gst bill, gst congress, gst news, congress gst news, parliament gst bill, business news, latest news What can be the way to win over the Congress? Or make them feel they won even as the government carries the day? (Illustration: C R Sasikumar)

The Congress finds itself in an odd situation. A party with conviction in economic reforms cannot be seen to be stalling the biggest indirect tax reform — the Goods and Services Tax — of post-liberalisation times. At the same time, it cannot internally justify giving credit for the passage of the GST law on a platter to the NDA government. So it chose to make it difficult for Prime Minister Narendra Modi. After all, as Chief Minister of Gujarat, Modi had no good reason to oppose the GST Bill. A former president of the Confederation of Indian Industry (CII) who had met him to convince him on GST, says Modi instinctively knew the benefits of the tax, but obstructed it for political reasons.

What then is the Congress’s ideological argument against the GST? It has raised three points: an 18% cap on the GST rate to be specified in the Constitution itself, formation of an independent GST Disputes Settlement Authority to be chaired by a judge, and scrapping of the proposed 1% additional tax that ends up favouring manufacturing states such as Gujarat and Maharashtra, both of which are ruled by the BJP today.

Finance Minister Arun Jaitley may be amenable to the third demand, but not to the first two. Including the tax rate in the Constitution will mean knocking at the legislature’s door every time the rate needs to be changed. It will be time consuming; besides the UPA itself did not provide for such a provision when it introduced the Bill. On the disputes settlement authority, the Congress had demanded that it be chaired by a judge, but which Jaitley had passionately warned against, saying it would be akin to giving the powers of the government to the judiciary.

It is true that indirect taxes — excise and customs duties — are the more regressive of taxes. Personal income tax depends on the income bracket that an individual falls in, indirect taxes affect the poor and high net worth individuals alike. A watchman will pay the same excise duty on a pair of shoes as a bank executive. So it does seem that there is merit in the Congress’s argument — because the taxman would always aspire to collect higher revenues, and any Finance Minister may be tempted to raise tax rates to shore up receipts. A cap on rates in the Constitution itself will dissuade the government of the day from increasing rates — this is particularly important in developing economies like India.

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But this ideological position is not rooted in facts. A detailed scrutiny of excise duties, which have evolved over many decades, shows that products consumed by the poor and the less affluent are taxed at rates that are lower than the tax on products that are typically consumed by the rich. So, for instance, hawai chappals or footwear that costs less than Rs 500 is excise duty exempt — as are biscuits that cost less than Rs 100 per kg, pens, refills, and kerosene stoves. However, cream biscuits, expensive leather shoes, or four-burner branded stoves are taxed at the full rate. Governments have attempted over the years to factor in income inequities even in the indirect tax structure.

The sub-committee report on revenue neutral rate (RNR) and structure of rates for GST chaired by Chief Economic Adviser Arvind Subramanian clearly shows that three-fourths of the items that comprise the Consumer Price Index basket are tax exempt. CPI more or less mirrors the total consumption basket of India. Food and beverages, rent and clothing with large weight in the CPI are either exempt or taxed at low rates. Similarly, 47% of CPI items do not attract any sales tax. Just 15% of the CPI is taxed at the normal rate (12.4% to 29.4%). This suggests that category by category, most things that the poor consume are taxed at a lower rate in India. And this would appear to be by design, despite the lobbying by industry groups ahead of the Budget every year.

So, what can be the way to win over the Congress? Or make them feel they won even as the government carries the day? Definitely, the Congress does not want to be the only party opposed to GST, a reform that will create a single common market for goods and services, one that will reduce cascading of taxes for the industry, and add up to 2% to the country’s economic output. It is here that the government needs to innovate, imagine an intelligent turn of phrase, that will give the Congress confidence that it has won the ideological battle. The principal Opposition party wants legal ring-fencing of the GST rate. Without necessarily specifying a rate cap in the Constitution, the government can state indirect taxes as a percentage of GDP will not cross a certain level. The GST Council, comprising the Centre and states, can also be mandated to strongly recommend the lowest tax rate. If the Congress is willing to come close to halfway, surely the government can be innovative and accommodative enough to take two extra steps to reach out. To not just the Congress, but also the Left and AIADMK, who are still either outside the tent or sitting on the fence.

An agreement, it should be noted, is just the beginning of the GST implementation story. After the Constitutional Amendment Bill, the Centre and all states have to enact the GST legislation, the 190-page draft of which is in public domain, but has not been widely read. It is only after this that the more arduous task of mapping tax rates on various goods and services between the Centre and states will commence. That will be the next big hurdle, which will have to be tackled separately.

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