GST: Disruptive but developmental
It is not just a tax collecting system but a regime that is bringing about changes in the national value system
The body of work—constitutional provisions, laws, rules, schedules, procedures and processes—of 30 governments over 15 years which culminated in the introduction of the goods and services tax (GST) has been on the ground now for seven fortnights.
While less than 100 days is very early in the day to pass any judgement on the Indian GST experiment, or make sense of revenue numbers that are coming, a quick list of big wins and losses can be put together.
The big unqualified win is the emergence of the GST Council as India’s first federal institution; genuinely federal and fully functional. In the last 70 years, despite repeated efforts, no federal institution has emerged. Be it the Finance Commission, Planning Commission or its new avtaar, the NITI Aayog, or even the Inter-state Council.
Despite their institutional design and mandate within a federal set-up, either these institutions have been dysfunctional or controlled by and leaning towards the centre. Indeed, to borrow a memorable line of S. Guhan, these institutions “bark at the centre and bite the states”. They dealt with all the federal issues from a very centric mindset.
The GST Council has changed all that. In the years to come, this Council will not only be the centrepiece of the new federal fiscal architecture, but will also be a role model for institutions that are bound to come up.
Apart from its composition, what has made the Council remarkably federal is the process of decision making. In the 21 meetings so far, hundreds of decisions have been taken, ranging from legislative to operational. Every single decision has been made by building a consensus. Nothing has been put to vote. Of course, there have been strong disagreements, deep divisions on many issues. This decision by consensus has not only set a precedent but has also become the DNA of this institution. For this, credit must go to Union finance minister Arun Jaitley.
The big systemic gain is that somewhere along the way the country has discovered an alternative way of formulating laws. On many occasions, the GST Council converted itself into a drafting committee. The Council discussed draft laws section by section. In fact, line by line, making changes on the fly and in real time. It was redrafting proposed formulation of laws live as it were. Even in Parliament, this has never been done. Indeed, one can’t think of any place in the world where such participative lawmaking has happened. This style and method needs to be showcased and replicated elsewhere in the country.
Finally, at the institutional level, GST in India is a bold experiment of pooling of sovereignty by the centre and the states in matters of taxation. This can have huge implications on the political economy of the nation as also on how our polity can be structured for functional purposes in the years to come.
In the course of its intensive and extensive debates, the GST Council has created a fraternity of finance ministers. At a professional level, the Council is a forum for sharing best practices. At a personal level, it has engendered a rarely seen camaraderie.
The first 100 days haven’t caused as much of a disruption in the basic macro-economic variables as had been expected or as had been the cross-country experience. There hasn’t been a post-gst inflation spiral as has been seen in many countries like Singapore, Australia and New Zealand.
Given the fact that GST as a tax regime is still work-in-progress, the multiple rate slabs will converge over time. It is very likely that the two slabs of 12% and 18% will converge to 14.5% sooner than later. Indeed, the Union finance minster indicated a reduction of tax slabs a couple of days ago. Along with this, the number of commodities attracting 28% tax will have to be trimmed.
It is true that the GST council erred on the side of caution and pitched the rates high. This was driven by revenue considerations as well as compensation financing requirements. It needs to be pointed out that the way the compensation scheme for loss of revenue due to GST is designed, states have virtually got a tax insurance! It effectively covers everything ranging from inefficiency in collection to loss caused by a natural calamity. Such an openended compensation could not have been financed by the centre’s receipts alone.
One often hears that the issue of procedural and compliance matters has become very cumbersome in the new regime. While there is some merit in the argument, especially with regard to small businesses, let us not forget that three months ago businesses were filing multiple returns: separate returns for valueadded tax (VAT), excise duty, service tax, and countervailing duty. All these have been replaced by one GST return.
What is causing compliance distress is not the returns per se but the frequency of filing; from a quarterly cycle, businesses have had to move to a monthly cycle. It should be possible for the GST Council to address this issue based on the emerging revenue patterns.
From a systemic point of view, there are two issues the GST Council needs to deliberate on. First is the relevance of a maximum retail price (MRP) system—an anachronism from control raj days—in a GST regime. The MRP system was relevant in a pre-liberalized economy operating with producer taxation. The producers would work out the costs and margins of the distribution chain and allocate that within the MRP.
Now it is a consumption tax, with final payment of tax at the last stage. Here, it becomes an anomaly to have an MRP. It over-determines the system. The result in the last three months has been that GST is being charged over and above the MRP!
Second is an unstated business ethics issue which is coming to the fore under the transition to GST. It is an open secret that businesses in India have been operating different accounts to avoid paying taxes. There is a fear among the business and trading community that after full implementation of GST, tax officials can analyse turnover, other details and arrive at estimates of possible tax evasion over past years.
Not only indirect tax officials, but also direct tax officials can analyse the data to calculate possible incomes of business in the past and compare it with the income tax paid. This fear of possible retrospective tax inspection and survey lies at the heart of the chorus against GST and its implementation.
Most businesses and traders want to come clean by complying with the GST laws. To boost their confidence in doing so, the GST Council could get a clarification issued that cases under the earlier tax regimes will not be reopened due to a change in volume of transactions or turnover or some other parameters under the GST regime. This done, the chorus against the so-called tardy implementation of GST will stop in a day.
It is for these reasons that GST should not be seen only as a tax collecting system but a regime that has huge social and business ethics implications. What we are hearing today on the negativities of GST are in part a resistance to a behavioural, social and the value system change that GST is threatening to bring about and enforce. Therein lies the real pain.
Haseeb A. Drabu is the finance minister of Jammu and Kashmir
Political economy: Union finance minister Arun Jaitley. The GST Council has emerged as India’s first federal institution; genuinely federal and fully functional.