GSTing ahead, one hurdle at a time

The National Democratic Alliance government has successfully cleared the first hurdle in the process of introducing a countrywide goods and services tax but a steeplechase lies ahead.

The amendment to the Constitution gives concurrent powers to the Centre and States to tax goods and services. Currently, the Centre can tax goods at the manufacturing stage with excise duty and States can tax sale of goods with State value added tax. That will change once the GST comes into force.

As in a steeplechase, the Government could stumble a few times before the race is completed. The finance ministry has set itself a very tight deadline to go through all the processes. The immediate priority is to get the amendment to the Constitution ratified by 16 States. It hopes the States will ratify the constitutional amendment in the next one month. It reasons that most State legislatures are in the midst of the monsoon session or can call a special session to clear the amendment. The BJP-ruled States will certainly conform to that deadline, and it can be expected many others, particularly those that stand to benefit from the GST regime, will too. Now that is the easy part. Getting presidential assent for the amendment and the Cabinet approval for setting up the GST Council, the Central GST Act and the Integrated GST (IGST) Act too pose no difficulties. The IGST Act applies to taxing all inter-State transactions of goods and services.

Difficulties will arise only after that. The GST Council, which will be chaired by the finance minister, has a critical role to play in building consensus among the States on all important issues such as tax rates, exemptions and threshold limits. To be fair, the finance ministry has acknowledged that there are many challenges to overcome. It also has to build consensus around a model State GST Act and the IGST.

Take, for instance, the tax rates. So far, there is no consensus on that. The objective is to find an optimal rate that will not hurt consumers and yet protect the tax revenues of the Centre and States. Finance Minister Arun Jaitley told the Rajya Sabha that 65 per cent of the items suffer weighted average tax burden of about 27 per cent. With other components of taxes such as octroi, entry tax and cess, the total burden on many items rises to 30 per cent. The standard rate of tax under GST will definitely be lower than that. But it is likely to be higher than the 18 per cent the Congress demanded. Jaitley indicated as much at a press briefing when he pointed out that the assumptions on which Chief Economic Adviser Arvind Subramanian had relied to recommend a revenue neutral rate of 15-15.5 per cent which would lead to a standard rate of 17-18 per cent had changed since the report was presented. New taxes and cesses had been introduced that had increased the tax revenues of the Centre and States.

The decision on the rates will depend on multiple factors: the items that will be in the GST tax net, businesses that will be in the GST net, items that will be allowed concessional rate, and items that will be taxed at demerit rate.

States may also want to levy certain taxes and cesses over and above the GST rate on certain items. Getting 29 States and the two Union Territories with legislatures to agree to a common basket of exempt items and items that will be taxed at a concessional rate will require a lot of negotiations and commitment from the States to stay with the consensus. That has been a problem area under State VAT.

There are likely to be big disagreements on rates between manufacturing States and consuming States — manufacturing States stand to lose a lot of revenue because of the nature of GST. Being a destination-based consumption tax, all taxes on items manufactured in one State and consumed in another will be transferred to the State where the consumer of that item is under the IGST.

Given that the Government has decided to scrap the 1 per cent additional tax on manufactured items, the States with a strong manufacturing base will seek other ways to make up their loss, the assurance of 100 per cent compensation for revenue losses notwithstanding.

The risk with high tax rate is that it will lead to inflation for services. Services currently attract 15 per cent tax, inclusive of Swachh Bharat cess and Krishi Kalyan cess, and a steep rise will not be acceptable to consumers.

The Centre will need to make many conciliatory moves and concessions in the months ahead, and heed the concerns of industry and consumers, as it did in the last few weeks, in the process of rolling out GST.

Only then can it go back to the electorate in 2019 and claim credit for the biggest tax reform in years.

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