GST’s Karmic Reality: Why Modi And Jaitley May Succeed Where Congress Failed

The doggedness with which the Modi government has pursued the goods and services tax (GST), now closer to fruition than ever, has a karmic ring to it: right action without any guarantee of results. The GST is the greatest tax reform ever attempted by India, started by AB Vajpayee, pursued by Manmohan Singh, and now brought to near closure by Narendra Modi and Arun Jaitley. If it finally becomes law, either this fiscal or the next, it will be a truly historic achievement that will bring more pain than pleasure in this term of the Modi government.

At a meeting of state finance ministers yesterday (14 June) in Kolkata, almost all states were on board, thus proving beyond doubt that the Congress-articulated conditions – putting an 18 percent ceiling rate into the constitution – was pure politics. No Congress state opposed the basic idea of leaving the rate flexible, even though there is an initial commitment to keep the rate at not more than 18 percent. Tamil Nadu is uncomfortable with the GST, and made its objections clear, but it is unlikely to block the idea altogether in view of Jaitley’s guarantee of full compensation for five years to states suffering any loss of revenues due to GST.

If there is one thing that differentiated the Modi-Jaitley approach to GST compared to the earlier Congress-Chidambaram approach, it was the abandonment of the centre’s “I-know-what’s-good-for-states” attitude of arrogance. Chidambaram hemmed-and-hawed on compensating states for their earlier value-added tax losses, but Jaitley tried to carry all of them, including by agreeing to allow manufacturing states to levy a 1 percent tax on inter-state sales – a bad idea. Hopefully, this idea, for once opposed by Congress for legitimate reasons, will be given up. When states are going to be compensated for their losses, to give some states another 1 percent tax opportunity makes no sense.

What is truly commendable about the Modi government’s approach is that it has gone for GST even though there is little chance that it will reap any immediate gains from it, economic or political.

While some economists have suggested a GDP bonanza of upto 2 percent extra due to GST, this is just pie-in-the-sky. There is no way to ensure this will happen, especially in the remaining three years of the Modi tenure, when growth is anyway inching up. The chances are any uptick in growth will be attributed to GST, when it may be natural revenue buoyancy on economic revival.

However, the GST is worth pursuing for one simple reason: it is a self-collecting tax that will slowly eliminate tax evasion. It will make manufacturers, service providers and traders collect the right amount of taxes from consumers, since you can set off taxes collected in the intermediate stages from what is payable on final sale.

Consider the risks the government is courting in pushing GST.

One, there will be major implementation hiccups and heartburn, as states and centre wrangle over who will collect what revenue from whom. As things stand, the states will have sole jurisdiction over revenue collections from traders with turnover upto Rs 1.5 crore. Beyond this, both states and centre will have dual control – ensuring a lot of tension in the early phases of implementation. The IT software for ensuring smooth compliance with the new tax may also throw up some glitches and confusion. So, at least one year of pain is guaranteed, if not two. GST will settle down only by 2018, assuming it is legislated this year. If not, it will drag on right till 2019.

Two, the BJP is kissing goodbye to the goodwill of the trading community, which will now be targeted for taxes that it could earlier avoid. Considering that traders have been its backbone of support earlier, this is a huge political sacrifice. GST also mildly favours consuming states over manufacturing ones; this means the BJP will be antagonising its own state governments in Gujarat and Maharashtra, among others.

Three, the initial phases of implementation will surely deliver a cost push, as products not previously taxed, especially services, will face higher taxes. This will boost services inflation, which is already underway. Cost-push price increases will slow down growth in the initial year or two, making revenue targets difficult to achieve. If this happens, and states start demanding compensation, Jaitley will face another pressure on his fiscal front. He needs to give himself flexibility on the fiscal side at least in the initial three years. The fiscal roadmap has to be redrawn keeping GST in mind.

Four, many elements of the new GST rates are yet to be fully agreed. The Arvind Subramanian panel has recommended three broad rates for GST – 17-18 percent for most goods and services; 12 percent for essentials, and 40 percent for luxury items (including tobacco), and 2-6 percent for precious metals, says The Economic Times. Not an easy plan to implement in year one.

Five, then there is the legislative hurdle. The BJP will have to get the constitutional amendment passed in the Rajya Sabha. This will be easier as the numbers have changed in its favour, but there will be a lot of wheeling and dealing to do with the states which hold the key to the numbers, especially the AIADMK, the SP, the BSP and the Trinamool Congress. Once the Rajya Sabha hurdle is crossed, 15 states have to pass it (which will take time), and then there will be three more laws to pass – the Central GST Act, the State GST Act, and the Integrated GST Act.

Jaitley has nothing but work, work and more work in the months ahead. Which is why it is truly courageous of the Modi government to plod on consistently on GST.