Self-inflicted damage

Centre must undo note ban's damage to GST timeline

The highlight of the winter session of Parliament was supposed to be the passage of Bills to give force to the constitutional amendment enabling the goods and services tax, or GST. Passage of those bills in a timely manner – and the ratification of the GST amendment by the necessary number of state Assemblies – was essential in order to meet the timeline set out for the implementation of the new indirect tax regime. Yet the winter session will close without progress on this count, and the meeting of the GST Council has been postponed yet again, to December 22. Although the GST is supposed to come into force on April 1, 2017, clearly the political and economic chaos unleashed by the government’s November 8 decision to withdraw the legal tender status of Rs 500 and Rs 1,000 notes has rendered that deadline increasingly difficult to meet. The Centre will have to take extraordinary measures and expend considerable political capital to overcome this hurdle of its own making.

Recently, West Bengal Finance Minister Amit Mitra, who heads the empowered group of state finance ministers that deals with the GST, said that a majority of his peers were against the implementation of the new tax in an economy reeling from the shock of demonetisation. Mr Mitra also cited concerns about state finances in the wake of demonetisation, saying that the states were willing to take a hit for the GST, but this additional cost would be too much. It has been reported that the legislation is not finalised yet and the “erosion” of trust between the states and the Centre following the demonetisation decision has caused that process to be delayed. That trust was essential to solve various continuing problems, such as the “dual control” of taxpayers. Until the GST Council finalises the structure of assessment under the new regime, companies, especially smaller ones, can hardly finalise their compliance mechanisms. The government should not leave this preparation for compliance to the last minute. Software will need to be adapted and put in place, professionals trained, and entire supply chains sensitised to the new system. A smooth transition will need companies to be well prepared. This will be impossible if India Inc is given only a few months. Clearly, much spadework remains to be done if the April 1 deadline is to be met.

It is the Centre’s decision to demonetise that has sparked off this confrontation, and the onus is on the Centre to defuse it. The GST is one of the biggest reform steps under the current government at the Centre, and one of the biggest reforms in decades; it has already been long delayed, and should not be delayed further. But even a September deadline for the GST will require the Centre to act swiftly to reassure the states. The atmosphere has been vitiated after November 8 and voices have become more acrimonious. If the Centre has to make swift compromises, it must do so in order to bridge the trust deficit. However, these compromises cannot further dilute the GST, which is already a great distance from the ideal law that was proposed. New Delhi has a difficult balance to maintain, and little time to do it in.