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

Mint Asia ST - - Cover - BHY ASEEB D RABU

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.

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