GST Bill a sub-optimal outcome

The tabling of the Constitution (Amendment) Bill in Parliament is a step forward in the Government’s agenda for implementation of the Goods and Services Tax (GST). However, the GST model conceived in the Bill isn’t the one industry was clamouring for. It is not the flawless GST the 13th Finance Commission had recommended. It is a Bill on which several Cabinet ministers had expressed concerns. The Planning Commission also had significant reservations.

However, the finance minister is in a hurry and does not want to lose any more time. He recognises flaws in the GST model proposed in the Bill, but has not been successful in persuading the Empowered Committee of State Finance Ministers (ECSFM) to look beyond their self interests. In many ways, the model is contrary to the interests of individual states. This is a clear case of revenue-maximising behaviour of individual states leading to a sub-optimal outcome for the group as a whole. Many states admit the outcome is unappetising and sure to cause indigestion.

The main flaw of the Bill is that it excludes important sectors from the GST ambit. Sectors such as petroleum, natural gas, real estate and alcohol are proposed to be kept outside the GST domain. Even for electricity, while the Bill is silent, indications are that it would also be kept outside the GST scope. The States have indicated they’d continue to levy electricity duty, which would preclude application of GST.

Keeping the core sectors out of the GST domain would have serious implications for the industry. These sectors are the foundation of all commercial and industrial activity and their exclusion would result in considerable cascading of taxes. The cascading in petroleum sector alone is estimated to be Rs 35,000 crore per annum! Since the exclusion is provided in the Constitution itself, it precludes any future move to include them into GST. Exclusion of these sectors serves no social, economic or fiscal policy objectives.

The second major flaw is that certain distortionary taxes such as the entry tax and octroi, and the entertainment tax, would be kept alive to the extent levied and collected by a panchayat or municipality. Continuation of these levies outside the GST would perpetuate problems in the existing structure and be a hurdle in attaining the simplicity and efficiency that GST seeks to achieve.

Flawed strategy
Where did things go wrong? Perhaps the Government aimed too high in asking for a uniform GST in all states.

Ideally, the Constitution should have been amended only to empower the Centre and the States to levy GST in a comprehensive manner on all supplies, including real property. Any exclusions from the base should have been left to be dealt with in the GST legislation.

Further, rather than asking all states to follow a common model, the Government could have created a comprehensive model, allowing states to opt in, as under the Canadian model.

Given the state of affairs, the tabling of the Bill in Parliament, to be referred to a Standing Committee thereafter, is a significant development in that it would allow a fresh opportunity to carry forward the GST discussions. The ECSFM forum has not allowed meaningful discussions and completely ignored the industry’s views, making the consultative process lopsided. It is strange that the Empowered Committee did not see fit to allow any industry group to make a presentation on the subject.

Never before has there been such a clamour for a comprehensive GST to be introduced. A good reform has been hamstrung not because of taxpayers, but because of the narrow vision of governments. The industry and the government have now pinned their hopes on the parliamentary committee to salvage the GST.

(The writer is tax partner, Ernst & Young. The views are personal)