In a rare act of political bi-partisanship, parties across the political spectrum last week joined hands and approved the 122nd Constitutional Amendment Bill, which will pave the way for the goods and services tax (GST) in the country. Though the government has said it will work over-time to get it implemented by April 1, 2017, most observers believe it will take more longer, and the second half of 2017 is being seen as the more likely time-frame.
It took more than 11 years for a consensus to be evolved and that’s not surprising in a country like India. To bring in the GST, the Constitution has to be amended because the Centre at present does not have the powers to impose a tax on goods and services; that power now vests only with the States. Now, at least 50 per cent of the State Assemblies (15 out of 29 States) will have to ratify it, after which it will go for the President’s assent.
Assam is the first State Assembly to have unanimously passed the GST Bill on Friday.
Surprising consensus
Despite political wrangling by the two major political parties — BJP and Congress — and a host of other regional parties, there seems to be a surprising degree of consensus among the political class about the need to have a common market and a streamlined tax structure that will streamline movement of goods across States and ease business.
It was in 2003, under the erstwhile NDA government, that the Kelkar Task Force on Indirect Taxes was formed; it was this panel which suggested a comprehensive goods and services tax. In the 2006-07 Budget, the then Finance Minister, P Chidambaram, of the UPA-I government, announced the plan to implement GST by April1, 2010. So there indeed was a broad consensus among both political parties on the necessity of such a tax.
In fact, even the Left parties were on board as it was Prime Minister Atal Bihari Vajpayee who, in 2000, formed the Empowered Committee and appointed West Bengal Finance Minister Asim Dasgupta of the CPI-M to head it. Dasgupta was recently quoted in the media as saying that by 2010, 80 per cent of the work for GST had been done. But Dasgupta resigned after the Left Front’s defeat in 2011 elections in Bengal and Sushil Modi, who was the Finance Minister of Bihar, then took over.
So the consensus for such a national-level tax straddled the Left, Right and Centre.
No immediate impact
One needs, however, to be careful about the hype being created around the GST. The implementation of it is still some time away. But even when it gets implemented, its impact on the economy will not be felt overnight. In fact even the Chief Economic Advisor has cautioned that the GST will not lead to a surge in investments. What the GST will do is to streamline the tax structure, which is expected to lead to better compliance and easier movement of goods across States. It is, at best, an enabling Act by the government to ‘ease the doing of business’.
Another reason it is wrong to assume that investments will pour in as soon as GST is in place is that there are a myriad factors that industry takes into account while making investment decisions, factors over which the government has little control.
Among the regional parties, AIADMK and Trinamool Congress were the most vocal in their opposition to GST though the TMC later came on board after Amit Mitra was made the Empowered Committee’s chairman. The AIADMK walked out of the Rajya Sabha before the vote, making it the only party to oppose the GST.
Genuine fears
The States’ fears over GST are genuine and can be classified under two factors. One is the revenue loss the States are likely to suffer, though the Centre has assured the States of compensation for the first five years after the GST comes into force. After the first five years the Centre’s compensation will taper so States have to either look for alternative sources of funds or be more prudent in their spending.
The second factor is that the GST is going to impinge on the States’ powers of taxation, which raises questions on the federal model of governance that India has followed since Independence.
There are fears that the GST Council, a Constitutional body, will impinge on the sovereignty of Parliament and State Assemblies. Tamil Nadu Chief Minister J Jayalalithaa has said in recent media reports that the States stand to lose ₹9,270 crore. She has further questioned the Centre’s veto power in the GST Council and also the fact that all States are being treated with equal weightage in the Council. She wants the weight of each State to be in proportion to its representation in the Rajya Sabha.
So, there are many hitches ahead. The most important being the fixing of the tax rate. A rate too high will act as a disincentive for industry and defeat the very purpose of the GST. At the same time, a low rate will have obvious revenue implications, both for the Centre as well as the States.
But the most important hurdle has been crossed and the Centre and the States have to trust each other and traverse the difficult path ahead together. As the CEA Arvind Subramanian said, “there is no perfect system of GST, it evolves over time”.