GST implementation will devalue Central budget

The hype over introduction of GST created an atmosphere as if India would be radically different from the midnight of June 30. There was widespread fear that prices would zoom, trading collapse, farmers would be burdened with huge tax burden, retailers would cheat consumers charging premium on old stocks of goods.

It reminded one of the scare over the infamous Dunkel Draft in the run up to the adoption of WTO years back. Dunkel was to stop sowing of crops in India, create intellectual property for the West out of thin air and so on. Dunkel Draft came and went. WTO was adopted and stricter intellectual property laws were sought.

Today, WTO itself looks like it has been forgotten. It has fallen by the wayside and global trade is still going on and rankling over IPO no less. The show and pomp over introduction of GST now looks a little jaded. After all, it was just a change in tax administration. Whether it merited a Central Hall treatment itself appears somewhat exaggerated. Admittedly, the journey to June 30 has been rather tortuous. Surely, it involved enormous amount of cajoling and contortions to arrive at this position.

R.L.Stevenson, author of Treasure Island and noted essayist, once observed: “To travel hopefully is as important as to arrive”. Certainly, the journey towards the eventual rollout of a single tax on all goods and services throughout the country was noteworthy. When it was proposed for the first time by Dr Vijay Kelkar in 2004, it was just about an intellectual intent.

Vijay Kelkar is one of the most accomplished economic administrators in this country. A technocrat to begin with, Kelkar had subsequently studied economics. He had acquired the reputation of being one of the most well-read persons, alongside the redoubtable Sukhamoy Chakraborty. Sukhamoy died young but as long as he was alive and sitting in his small chamber in Planning Commission, he was considered the oracle. A small group of people would gather around him and Vijay Kelkar often would be one of them.

As an adviser to the finance minister, Dr Kelkar had written and deliberated on an amazingly wide variety of topics on economic policy and administration in this country. At one point, he had suggested creation of a natural gas grid for meeting the energy requirements of the country. The idea was proposed well ahead of its time, it appears in hindsight. Natural gas, as a clean, reliable and useful source of energy, has become fashionable only recently.

Kelkar had looked into the maze that was indirect taxation and mooted the idea of sweeping away the cobwebs with a uniform single impost with just one single rate of 5%. It was inconceivable when it was first mooted. This involved surmounting the enormous impediment of objections from states. After all, states had little taxing powers to fund their ever-increasing thirst. How could they be convinced that such a system could also protect states’ interests?

Ironically the job was entrusted to the Leftist West Bengal government’s finance minister. Dr Ashim Das Gupta, although the finance minister of a Left-ruled state, which had decades-long tradition of cringing, was less of a hardcore Communist and more of an economist. A teacher of economics at the Calcutta University, students were extremely fond of his neat lectures on growth theory. He had gone to America to study the subject further and pronouncedly right-wing economist, Jagdish Bagwati, is once reputed to have observed that he could never make out that Ashim Das Gupta was a Communist.

As chairman of the Empowered Committee on GST, Ashim Das Gupta had taken on the task of persuading recalcitrant state finance ministers to accept the idea. He had become so adept with the issues of rolling out a national GST that Dr Das Gupta could deliver lectures on that at industry bodies for hours on end without a scrap of paper.

The biggest irony was however that the GST negotiations and the bill could not be completed for a long time for dogged opposition from none other than Narendra Modi as Gujarat chief minister. Fatefully, it is he who would one day take the centre stage in Parliament’s Central Hall to launch the good and simple tax. Good it is, but whether it is simple is doubtful.

GST’s implementation would be one of the most complicated tasks, with its smooth and successful functioning predicated on the dedicated IT backbone which has been developed. One can safely say that there will be bugs in the system once it starts working on the ground. There would be anomalies in the structure which will call for immediate corrective action. But in the end, it should work fine. The good thing is that once the fine-tuned, correctly honed tax structure is in place, it will make a difference.

To my mind the first difference it will make will be to the union budget. Once GST is working, the union budget would be redundant for popular interest. After all, the day after the union budget was placed, the lay person would look for the prices. Depending on the finance ministers’ whims and fancies, and the depth of the budget deficit, excise duties would be raised (mostly) jacking up prices of ACs and fridges to biscuits and cigarettes. Cigarettes had borne the highest brunt.

All that will be in the past. The union finance minister will have no powers to change taxes, whether he has increasing deficit or a surplus in the budget. That can be done by the GST Council, which is the combined wisdom (or lack of it) of all 29 states and one union finance minister. This could have a negative effect as the taxing becomes rigid.

Secondly, it will generate resentment among those who fall now into the tax net. Because tax paid on an earlier part of a supply chain can be deducted from the tax liabilities at subsequent stages only if taxes have been paid at the earlier stages, all buyers would ask for proof of this. Hence, there will be self policing and all have to fall in line. In effect, when the whole chain becomes operational, it should be possible that costs should come down.

Now, thirdly, will the government be magnanimous enough to cut down rates if overall revenues rise or in their greed the government will be profiteering on revenue bonanza?

THE hype over introduction of GST reminded one of the scare over the infamous Dunkel Draft in the run up to the adoption of WTO years back.