The Government Better Be Prepared To Kiss The GST Bill Goodbye

Finance minister Arun Jaitley’s fulsome praise for Manmohan Singh’s stint in North Block is not likely to help given the latest fallout over the JNU imbroglio–the violence at the Patiala House Courts. Buttering up Singh was not going to work any way. Singh said in this recent interview to India Today, when specifically asked about the GST Bill: “You cannot have a situation where you foist cases like National Herald and then expect. . .” The Herald case comes up for hearing on February 20. The government should consider itself lucky if it is allowed to present the budget.

But does that mean kissing GST and the benefits it will bring goodbye? Not necessarily.

A recommendation in a report submitted by the Expert Group on Taxation of Services headed by M. Govind Rao in 2001 can provide a way out. The report had suggested merging central excise duty and service tax into a unified tax.

Fifteen years later, Rao still feels the recommendation needs to be taken up. The many tax rates in excise, he suggests, should be unified into two. The threshold for paying excise can be reduced and that of service tax can be increased to Rs 1 crore (currently it is Rs 2.5 crore for excise and Rs 10 lakh for service tax). And then there can be the same general rate of tax for both goods and services. Since there is already a provision of setting of taxes paid on services against goods and vice versa, this will result in a GST at the central level.

The two Acts levying excise and service tax, says Rao, can easily be amended to enable a single tax. States can come on board whenever the Constitution amendment Bill gets through Parliament. Even if they do not, the central GST will bring gains in its wake. “Setoffs will become easier. A manufacturing level GST simplifies the tax system further and will have an impact on growth and revenue,” says Pinaki Chakraborty, professor at the National Institute of Public Finance and Policy (NIPFP).

In fact, states will come on board faster if the central GST is designed and implemented, he says, pointing out that the transition to VAT (value-added tax) in 2005 was made easier by the fact that Haryana, which implemented VAT in 2003, saw a surge in revenues.

But there are still some sticky issues holding states back as far as GST is concerned. One of them relates to compensation for losing revenue. Chakraborty feels states should not have any apprehensions on this count, since the Constitution amendment Bill provides for compensation.

Besides, the experience of implementing VAT shows states will not have huge loss of revenue, he says. In the case of GST, states are now getting to tax services, which they could not earlier. The issue of compensation will arise only in the context of the magnitude of credit (since an integrated GST will end cascading, the net positive or negative will depend on whether the credit given is more than the revenue earned) and the loss of central sales tax (CST) revenue.

“Compensation is not an issue that is equal for everybody. For some it is more, for some it may not be there at all, for some it may be an insignificant amount.” For example, loss of CST revenue will be a huge issue only for large producing states as well as mineral-rich states.

That’s why payment of compensation will not derail the central government’s finances given low revenue growth, he assures. Though macro stabilisation is the centre’s function, he feels the centre may need to bear the cost to enable the country to have a simplified, better indirect tax regime.

More than the loss of revenue, what states fear, says Chakraborty, is the loss of fiscal autonomy, since the GST Council will be fixing the rates. “Imagine an individual state government having very little flexibility or control over policy relating to a tax that will give it 60-70 per cent of total tax revenue. It’s not easy.”

And GST, involving as it does a Constitutional amendment, is a one-way street; states cannot exit later. At the most, Chakraborty says, a state can refuse to follow Council’s recommendations. “It might be unconstitutional, but what can you do? You can’t dismiss a state government for increasing or decreasing a tax rate.”

That’s an issue R. Kavita Rao, also a professor at NIPFP, flags. The Council is an advisory body and every state is to enact its own GST laws and rules. “There is no clarity on whether they are allowed to diverge from the Council’s recommendations,” she points out.

Rao is sceptical of the government’s claims that if the GST Bill is passed in the budget session, it will be possible to roll it out in the middle of the next financial year. There are far too many things to be ironed out, she notes. There is no final decision on even something as basic as whether there will be one authority administering GST or two (central and state). While some processes are ready and in the public domain, many are not. “A lot of the things people want to see finality on are just not clear.”

Even if the Bill is passed in the budget session and all states pass their respective Bills by August, it will take time for companies to put their systems in order to finalise their accounts and pay GST, she points out. While small firms may be able to manage, large firms with operations in different states will find it very difficult. Companies will need at least six months to transition. Besides, fresh registrations have to be done and close to 70 lakh registration numbers to be issued.

So does that mean there will be a lot of disruption in the initial phases? Under VAT, the first year was a bit problematic, says Chakraborty, but the system has now stabilised and it can smoothen the way for GST.

But VAT, he points out, was introduced in 2005 when the economy was very buoyant, so a lot of the benefits attributed to VAT may have come from that economic boom. Unfortunately, the economy is not doing well now. “If the design is imperfect and, at the same time, the economy is not growing, then people will start blaming GST, though GST is not the reason,” he says.

Rao agrees. “If the economy is not doing well, I won’t do GST reforms now.” Transiting to a new regime will involve short run disruptions which will not make compliance easier or benefit the economy.

So what happens to the estimates of a 0.9-1.7 per cent boost to GDP, in a study by the National Council of Applied Economic Research? That, points out Rao, was done with data for 2003-04. Since then states have shifted to VAT and the economy has moved from a moderately growing one to a fast growing one to a slow growing one. So those projections are outdated. The study also assumed electricity to be included in GST; it is not now. “The more comprehensive the design, the more the gains,” says Rao.

Chakraborty points out that the modelling exercise that threw up that estimate doesn’t work in the real economy. “GST will definitely simplify the tax system, develop a common market, encourage trade and business activity but I would not attempt a quantification of that in terms of growth.” In any case, adds Rao, the gains cannot come immediately. “Everything cannot play out in a year.”