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Now will Congress pass GST?

The BJP has the ammunition to pass the GST bill — most importantly, the promise of a revenue neutral GST tax rate of 11 per cent, which a task force set up by the Congress had first proposed in 2009

Written by Surjit S Bhalla , Prasanthi Ramakrishnan | New Delhi |
Updated: August 1, 2015 4:51:23 am
GST bill, GST tax, Congress, BJP, BJP government, Narendra Modi govt, Goods and Services Tax, Parliament session, AIADMK, TMC, Parliament news, india news, latest news, top stories Senior Congress leaders Ghulam Nabi Azad and Jai Ram Ramesh addressing media at party office in New Delhi. (Source: PTI file photo)

There is a whiff of optimism in the air on the passage of the goods and services tax (GST) constitutional amendment bill in this monsoon session of Parliament. We all wait for the Congress party to stop copying the BJP to the last drop of nonsense (the BJP prevented Parliament from functioning for six sessions, give us a chance, we are only at number two!). If Parliament is not open for business, then the GST bill cannot be passed. But what the Congress may not realise or, more accurately, is not willing to admit publicly is that the BJP holds all the cards with respect to the GST bill. Let us explain.

While the bill was passed in the Lok Sabha in the previous session, it did not get voted on in the Rajya Sabha due to the insistence of the Congress-led opposition on further legislative scrutiny — scrutiny that has been going on for the better part of seven years. In order to “mediate” these demands, a Rajya Sabha select committee was formed for the parties to come to a consensus. The select committee presented its recommendations on July 22.

However, there were three dissent notes — by the Congress, the AIADMK and the Left parties. This implies that out of 245 members in the Upper House, 89 were opposed to the existing form of the bill (Congress 68; AIADMK 11; Left 10). Together, these parties make up a little more than a third of the seats in the Rajya Sabha. And as the bill requires a two-thirds majority for passage in the House, getting some of them on board is necessary.

Meanwhile, the cabinet approved most of the contentious recommendations of the select committee within a week of its submission. Three important recommendations that were accepted: First, compensating states for revenue shortfall due to the GST for five years. Second, reducing the scope of the 1 per cent additional tax on inter-state supply to only “all forms of supply made for a consideration”, that is, on actual sales and not on inter-company stock or inventory transfers. Three, agreeing that a “band” tax rate would be finalised for the GST while framing the rules.

While the quick approval of these recommendations ensures that other parties are now on board with the bill, the dissenting parties (the Congress, AIADMK and Left) still have to be convinced. However, we feel that, to a large extent, most of the demands put forward in the dissent notes have been met. The main reason for dissent of the three parties was that there is “a need for decentralisation of powers and devolution of taxes in favour of the states”. The demand is that the Centre have only a 25 per cent representation on the GST Council rather than 33 per cent. Much ado about nothing?

The AIADMK had three additional unmet demands: that petroleum products be kept out of the GST indefinitely (already out for at least the next three years); that the states be allowed to impose higher taxes on tobacco products (implicitly agreed to); and additional retention of revenue from the Central GST for compensation on inter-state transfer of goods and services be permitted. This dissent has been made irrelevant as full compensation is being provided to the states for the next five years for any revenue loss.

What remains is the dissent of the Congress. It had three minor reasons for dissenting: greater representation of panchayats and special consideration to Union territories with a population of less than two million; and inclusion of tobacco, alcohol and electricity in the GST within five years.

The three major Congress objections: first, that the definition of “supply” in the 1 per cent additional tax needs to be clarified (more or less met because of the above-mentioned modification). Second, states should be compensated for revenue loss for three years — this has been agreed to and extended to five years.

The third and biggest Congress objection is on the GST rate. The Congress demands that this rate be no more than 18 per cent. We wonder if the Congress is aware of the following: a GST taskforce, set up in 2009 by the Congress, came to the conclusion that a revenue neutral rate (the rate at which the new Central GST and state GST would yield the same revenue as the old order) was 12 per cent — 5 per cent for the Central GST and 7 per cent for the state GST (Arbind Modi, chairman of the taskforce on goods and services tax, Thirteenth Finance Commission, December 15, 2009). This comprehensive study used five different methods to arrive at the all-important tax base. The study was based on 2007-08 income tax returns for more than 2.85 million firms.

Some broad statistics suggest that the Arbind Modi report may have the numbers right. First, only two-thirds of actual GDP forms the tax base, that is, almost 33 per cent of GDP is excluded from tax considerations. This exclusion is for value-added items, which will not be subject to the GST — health, education and unprocessed food articles. In addition, this 33 per cent includes non-compliance as well. The safe assumption is that if you have a turnover of at least Rs 1 crore (96 per cent of the firms considered), you should be in the tax net. If you are not, it is because of non-compliance.

This data can be used to project tax revenue for 2015-16 if the GST were already in place. In 2014-15, collection of taxes (Centre and state) that come under the GST umbrella was approximately 9.1 per cent of GDP — Central excise tax 1.5 per cent; state sales tax 4 per cent; Central service tax 1.3 per cent; other taxes 2.3 per cent. If so-called sin tax revenues (petroleum, alcohol and tobacco), accounting for approximately 1.6 per cent of GDP, are excluded, the GST should collect 7.5 per cent of GDP.

Given that the tax base is 67 per cent of GDP, the revenue generated at different tax rates on this tax base can be easily computed. For example, if there was an 11 per cent tax rate, then the tax collected will be (0.11×0.67xGDP) or 7.4 per cent of GDP in 2015-16. This is indeed Arbind Modi’s revenue neutral rate. With a 14 per cent GST tax rate, revenue will be approximately 9.4 per cent of GDP, or 2 percentage points more than the revenue neutral tax rate.

This is the ammunition that the BJP has. It can go to the people, and to the Congress, and say that all the GST demands have been met — and then some. It can also, in the spirit of common sense, completely abolish the 1 per cent “surcharge”. As Gujarat under Chief Minister Narendra Modi was supportive of this tax, this would be a doubly welcome gesture.

Given that the demands of all the dissenters have been met, the Congress will find it difficult not to allow Parliament to function, and not pass the GST legislation. If it continues to object, it will be exposed as transparently political and, at a minimum, intellectually dishonest. And, of course, it will prove that it is the most classic anti-poor party (but always whining about the poor). In its dissent note, the Congress’s first demand was that “GST rates are moderate and reasonable and do not impose an unfair burden on consumers, particularly poor consumers”. Will the Congress walk the talk?

Bhalla is chairman, Oxus Investments, and senior India analyst for the Observatory Group, a New York-based macroeconomic policy advisory firm. Ramakrishnan is an economist at Oxus Investments

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