The Narendra Modi government is appearing to be much closer to cracking the Goods and Services Tax (GST) code. For the first time in eight years, there seems to be an all-party consensus on major contentious issues relating to the jumbo indirect tax reform.
The proposal of 1 percent inter-state levy that would have negated the benefits of a uniform tax regime has been dropped, the states have been promised full compensation for likely losses in the first five years and both the Congress party and BJP have largely agreed to accommodate the GST rate in the Bill and not in the constitution to legally ring-fence the rate.
What is not yet decided is what should be the final standard GST rate that will apply to majority of goods. As for the concept of the revenue neutral rate (RNR), there isn’t a consensus among states.
There is a huge divergence on this rate between what has been proposed by the panel headed by Chief Economic Advisor (CEA), Arvind Subramanian in December last year and the 27 percent rate initially arrived at by the National Institute of Public Finance and Policy (NIPFP), which was commissioned by the government (both the Centre and the states) to work out a rate structure. With the government outright discarding that high rate, the NIPFP later came with revised structure going by which the standard rate can be 23-25 percent.
On the other hand, Subramanian had recommended a revenue neutral rate of 15-15.5 percent and a standard-rate of 18 percent. It has also recommended a three-tier rate structure for GST under which essential goods (those impacts the common man most) can be taxed at a lower rate of 12 percent, demerit goods like luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 40 percent and the rest at a standard rate of 17-18 percent. The standard rate is the rate which majority of the goods and services will be taxed. The NIPFP too had proposed a similar model of multi-rate structure to deal with the different segments of taxpayers.
Of the two, Subramanian’s three-tier structure appears to be the better model to safeguard the common man from the impending increase in the tax burden post the rollout of the GST. States are worried that a too low standard rate will hurt their revenues.
This is the reason producing states such as Maharashtra, Tamil Nadu and Gujarat are batting for a higher GST standard rate. Most likely the final consensus will come well above the 18 percent rate and may be in early 20s. But, at this stage, it is a guess work.
Finance minister Arun Jaitley will have to do more rounds of discussions with states to arrive at a final consensus. But, if the power to decide the rate can be left to the modified GST Council (where both the states and centre have representation) it is not a roadblock for the clearance of the constitutional amendment.
With the Congress easing up, the politics of GST is almost reduced to the remaining few dissenters such as J Jailalithaa’s AIADMK and BSP. The Left parties, who had earlier disagreed with the Bill, seem to have returned to the consensus path. Most other regional parties are on the pro-GST side. In the 243-member Upper House, the NDA will require 163 members supporting GST for the passage of the constitutional amendment.
Although, the NDA (which has 71 seats) might just win the number game if it gets the support of all regional parties, the constitutional amendment will be a meaningful exercise only if the Congress party too supports this. The reason is simple. Even after the amendment is passed, the individual state governments will have to pass the law in their respective assemblies, which include the Congress-ruled ones.
Given the magnitude of the GST rollout exercise the government can go ahead only with the support of all major stakeholders. As such, the Narendra Modi- government doesn’t have much time to prepare for the final rollout of the tax reform not missing the second deadline (1 April 2017). That is even after this constitutional amendment, rest of the work that include preparing the technology backbone needs to finished within the next nine months.
The sense of urgency within the Modi government to progress with the GST was evident on Wednesday with the NDA government rushing to the cabinet to clear the key changes in the GST Bill hours after the GST Council meeting. Remember, finance minister Arun Jaitley didn’t speak with media after the GST Council meeting, instead rushed to have informal meetings with Congress leaders such as Ghulam Nabi Azad and Anand Sharma and other parties in the opposition including the Left parties.
In the normal course, after a GST meeting, both the Congress and BJP leaders go the reporters to begin the blame game on how the other has spoiled the plan. This time, there was more strategy and mutual understanding not another show off.
This gives more certainty that this time there is a solid understanding between the national major parties on the crucial indirect tax reform process. Possibly for the first time since the idea of GST was first floated in 2007-2008, good economics seem to prevail over bad politics.
Given that there are major changes done in the Bill, it has to again go back to the Lok Sabha after the Upper House passes it. But, that’s a mere formality. As it appears now, the Bill will be introduced in Parliament by next week.
This website has been campaigning for the GST passage for last several weeks under the #SupportGST tag participating experts (economists, academics and industrialists) to send the message to the government that how important is the passage of the crucial tax reform in this session.
Passing the GST hurdle will significantly help address India’s reform-jinx and help the country consolidate its position among emerging economies, offering clarity on the tax regime to the investors. Having said that the GST is only a beginning step in the long road to reform overhaul.
There is significant work yet to be done in liberalising land, labor laws and addressing the issues of sector regulation to instill confidence in industries that this is the place to be. GST rollout will help broaden the tax base and boost revenues in a country where about 65 percent of the total tax revenues. Most economists agree that it can easily add to 1-1.5 percent to the GDP.
Whether it is the proverbial Modi magic, smart backroom strategy of Arun Jaitley or a serious rethinking in the Congress camp that it is fighting a losing battle on GST, India’s major political parties have seemingly given a break to the long practiced bad politics and given some room to good economics in the larger interest of the economy. GST is now closer to reality than ever.