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GST kiss and a quick kick

India today moved a step closer to a goods and services tax (GST) - touted as the biggest tax reform since Independence - after the Rajya Sabha passed a constitutional amendment bill that aims to bind its 29 states into a $2-trillion pan-India common market with 1.3 billion consumers.

By Our Special Correspondent
  • Published 4.08.16
Jaitley being fed sweets by Ravi Shankar Prasad after the passage of the bill. (PTI)

New Delhi, Aug. 3: India today moved a step closer to a goods and services tax (GST) - touted as the biggest tax reform since Independence - after the Rajya Sabha passed a constitutional amendment bill that aims to bind its 29 states into a $2-trillion pan-India common market with 1.3 billion consumers.

The voting on the legislation, which seeks to create a GST council that will deliberate and recommend a uniform, three-tier rate covering all goods and services across the country, was "unanimous" after the AIADMK staged a walkout just before the vote was taken.

Tamil Nadu, led by the Jayalalithaa-headed AIADMK, was the only state to resolutely set its face against the GST on the ground that the legislation was unconstitutional and violated the fiscal autonomy of the states.

At the end of a seven-hour debate on the contours of a tax reform that will take final shape only after the Centre and the states pass subsidiary legislation, possibly in the next three months, a deep wrangle broke out between Congress leaders led by P. Chidambaram and finance minister Arun Jaitley over the latter's refusal to give an assurance that he would not move the subsidiary legislation as a money bill.

"We will fully comply with the Constitution and the various precedents," Jaitley said, adding that he could not give such an assurance without seeing the text of the draft bill that will be prepared by the empowered committee of state finance ministers which has been piloting the tax.

The Congress fears that the government will move the legislation as a money bill, which would only require a vote in the Lok Sabha. The party wants it to be moved as a financial bill that would need to be debated and voted on in both Houses.

"We cannot have a situation where one House debates and the other House votes," Chidambaram said.

The Centre is hoping to bring the GST into force from April 1, 2017 - more than a decade after Chidambaram had floated the idea in his budget speech back in 2006.

At the start of the debate, the Congress backed down from its rigid insistence on the inclusion of a GST rate cap in the constitutional amendment bill but demanded an assurance from Jaitley that it would be clearly spelt out in the subsidiary legislation.

The Congress has been pushing for a standard rate of around 18 per cent, drawing on the recommendation made by a panel headed by chief economic adviser Arvind Subramanian in a report submitted last December.

But Jaitley refused to relent on this as well. "We will try and keep the rate as low as possible. The possibility of lowering it also exists," Jaitley said.

The finance minister said the large concertina of taxes, levies and cesses at the Centre and the states stack up to about 27 per cent. Last year, the National Institute of Public Finance and Policy, a government-funded research institution, had fixed the revenue neutral rate at 26 per cent. (Revenue neutral rate is a notional single rate which, when applied to all goods and services, keeps the revenue same as it was earlier.)

The Subramanian panel had trimmed the RNR to a more acceptable level of around 15 to 15.5 per cent.

The Congress has been wary of a high GST rate and Chidambaram insisted that it be held down to a moderate level, warning that it would otherwise become highly inflationary and trigger tax evasion. He said the standard rate should apply to 70 per cent of goods and services sold in the country.

"I don't think a rate above 20 per cent will fly. If they do that, it will be inflationary," said Harshankar Subramaniam, head of indirect tax at EY India.

"The government's idea of a single tax regime is crucial to improve ease of doing business in India and address the ambiguities of the current indirect tax landscape," said Microsoft India chairman Bhaskar Pramanik.

Jaitley said several state finance ministers had opposed the Subramanian panel's recommendation of a standard rate of around 18 per cent.

The finance minister said both the Centre and the states would retain their sovereignty. "We are experimenting with the idea of pooled sovereignty where the Centre and states will decide on a set of uniform rates for GST," he said.

He tried to blunt the argument that GST would be inflationary by arguing that 54 per cent of the basket of goods in the consumer price index - which serves as the official gauge for measuring inflation in the country - were tax exempt at present while 32 per cent were being taxed at a lowball rate. Only 15 per cent are being taxed at the proposed standard rate of 18 per cent. CPI inflation currently rules at 5.77 per cent.

The Trinamul Congress's Derek O'Brien opposed the idea of spelling out the standard rate in the subsidiary legislation, suggesting that the Congress might attempt to scupper the tax reform by adopting an intransigent stand on this issue. He accused the BJP and the Congress of playing ping-pong on GST, depending on which side of the aisle they occupied in the House. "We need to deliberate, debate and implement GST," he added.

Sitaram Yechury of the CPM said the Modi government ought to cut some slack to the state governments by working in some flexibility into the subsidiary legislation that would allow states to levy taxes like the 14.5 per cent health tax on fast foods like burgers and pastas in Kerala and a cess on cigarettes in Bengal.

The GST will have a dual monitoring structure - one by the states and the other by the Centre. This will ensure that even if one set of tax authorities fails to detect tax evasion, the other will not because of a digital trail of transactions that will minimise the incidence of taxation because of the concept of input tax credits. A manufacturer will be permitted to set off the taxes he pays on inputs against the tax he charges for onward sales.

There were some lighter moments as well over the GST - an acronym that Chidambaram preferred to spell out as Good Sense Triumphs, rubbing in the point that Prime Minister Narendra Modi had vigorously opposed the idea when he was chief minister of Gujarat. O'Brien labelled it as the Girgit Samjhauta Tax (a reference to a chameleon changing its colours), depending on whether the BJP or the Congress were in power or not.Jaitley and Chidambaram also sparred over the content of the legislation brought by the two parties: the Congress bill in 2011 and the BJP legislation in 2014.

Chidambaram said one sticking point in the BJP's constitutional amendment bill was the failure to establish a dispute resolution authority, which Pranab Mukherjee had provided for in the bill he moved on behalf of the Congress in 2011.

"The draft provision in the bill was abominable because it did not require the GST Council to set up a dispute resolution mechanism," Chidambaram said.

"The GST Council should by regulation set up a dispute resolution mechanism... and it should be done ex ante which means it must be established before any dispute arises," he said.

In his reply at the end of the debate, Jaitley riposted the Congress bill did not provide for compensation to the states for any loss of revenue. The BJP, he said, was ready to pay compensation for at least five years.