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Across the aisle: Good sense triumphs, danger lurks

If the government believes that GST will be a more efficient tax that will enhance revenues and reduce tax evasion, it must be prepared to take some risks.

Written by P Chidambaram | Published: August 7, 2016 7:46:06 am
GST Bill, What is GST bill, GST bill passed, gst, gst bill, gst bill effects, gst bill news, passing of gst, gst, gst affects, jaitley, arun jaitley, india taxes, india news, india gst Finance Minister Arun Jaitley and BJP members during the voting on the GST Bill in the Rajya Sabha in New Delhi on Wednesday. (PTI Photo)

The first round of the Goods and Services Tax (GST) Bill is over. There were no losers. The next round is expected in the Winter Session of Parliament beginning in November 2016. Key issues are still at large, and I wish to begin a debate on them.

Contrary to the impression that the Central government may have conveyed to the state finance ministers, the issue of Dispute Resolution has not been settled by the Bill that was passed by the Rajya Sabha recently. Article 131 of the Constitution allows states to file a suit in the Supreme Court for adjudication of disputes between states or between the Centre and one or more states. Besides, there are the well-known provisions such as Articles 32, 226 and 227.

In my view, the provision to establish a dispute settlement mechanism by the GST Council is constitutionally suspect. Be that as it may, assume that the mechanism ‘resolves’ a dispute between two states. If one of the states is dissatisfied with the verdict, nothing can prevent that state from challenging the decision by way of a suit or a writ petition. To assume that the ‘mechanism’ will be the final dispute resolution authority reflects a poor understanding of the provisions of the Constitution and the nature of ‘judicial power’.

The standard rate

A graver issue is the ‘standard rate’ of GST. The rate of tax is the heart of any tax law. A tax law must specify the rate (like the service tax law) or stipulate ceiling rates that cannot be breached by the executive government (like the excise law). The standard rate (say X) will apply to the vast majority of goods and services. Some goods and services will be zero rated; some goods and services will bear a lower rate (X-); and some demerit goods and services will bear a higher rate (X+).

What should be the standard rate is the question before the country. A committee headed by the government’s Chief Economic Adviser (CEA) has presented an excellent report based on sound economic grounds (see box). The Finance Minister did not reject the CEA’s report, he only added two caveats:

> that the report did not take into account the cesses imposed after 2013-14;

> that it did not take into account the compensation that the Central government had agreed to pay to the state governments for five years.

In my view, neither issue affects the conclusions of the report. The cesses may add 1 per cent to the Revenue Neutral Rate (RNR) but the report has suggested a standard rate that is 2.5 to 3 per cent above the RNR. Regarding compensation, the report categorically states, “In the aggregate, of course, the states should not suffer any loss in revenues because it is intrinsic to the calculation of a revenue neutral rate. That is, if the RNR for the states is set appropriately, states as a whole should have the same revenue as before (para 5.94).”

Socking the people

Moreover, if the government believes that GST will be a more efficient tax that will enhance revenues and reduce tax evasion, it must be prepared to take some risks. All risks cannot be balanced by socking the people with high rates of GST which is an indirect, and therefore regressive, tax. The idea of GST has been promoted as pro-growth and pro-people. A high standard rate will be dubbed — and will be seen — as anti-people.

There is, of course, the final question of roll-out of the GST. Two more Bills have to be passed by Parliament. Every state must pass a state GST law. The digital backbone — the GST Network — must be put in place, tested and ready to be operationalised. The GST Council must agree on the rates. Trade and industry must gear up for the new regime. At this stage, no date for the roll-out can be predicted.

Good and bad sense

Besides, the roll-out can be smooth only if the government stays on the path of engagement and negotiation. Any attempt to dis-engage with the Opposition or snub the Rajya Sabha will jeopardise the roll-out. The first test of intention will be when the Central-GST and Integrated-GST Bills are introduced in Parliament. Will they be introduced as money Bills to avoid a meaningful debate and vote in the Rajya Sabha or as financial Bills as demanded by all the non-BJP parties?

Good political sense triumphed on August 3, 2016. Bad economic sense or hubris could trip the GST. I keep my fingers crossed.

Report on the Revenue Neutral Rate and structure of rates

# 5.22. Adding up these adjustments yields a single RNR of 15 per cent. However, we recognise that there may be uncertainty about the adjustments we have made. An alternative scenario is that not all of the adjustments are valid. In this case, the single RNR would be 15.5 per cent.

# 5.23. Our recommendation for the RNR is, therefore, a range for the RNR of 15-15.5 per cent, with a strong preference for the lower end of
that range.

# 6.5. On structure, in line with growing international practice and with a view to facilitating compliance and administration, India should strive toward a one-rate structure as the medium-term goal.
Meanwhile, we recommend a three-rate structure. In order to ensure that the standard rate is kept close to the RNR, the maximum possible tax base should be taxed at the standard rate. The Committee would recommend the lower rates be kept around 12 per cent (Centre plus states) with standard rates varying between 17 and 18 per cent.

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