You are here: Home » Opinion » Columns
Business Standard

How 'impossible' GST became 'inevitable'

The Parliamentary Committee's endorsement has lifted this critical indirect tax reform above the quagmire of divisive politics

Satya Poddar 

Satya Poddar

The unequivocal endorsement of the Goods and Services Tax (GST) by the chaired by paves the way for its early implementation soon after the national elections. When the Constitutional (Amendment) Bill for was referred to the committee, some states were opposed to the per se and many to the constitutional framework for its implementation. Caught in the quagmire of divisive politics, GST, the game changer, was all but destined for oblivion.

Mr Sinha, in a true statesmanlike manner, has done an exceptional job of sifting through the various views, analysing them and building consensus on a model framework for an indirect taxation regime that will serve the Indian federation well for decades to come. The report provides a rigorous, critical review and a balanced consideration of the economic and political issues surrounding the

The issues before the committee were not trivial. They entailed a fundamental realignment of taxation powers of the Centre and the states and, more importantly, a replacement of individual powers by the requirement of collective exercise of those powers by 30 governments.

This required a fine balancing and a proper understanding of how the ideals of fiscal federalism can be achieved while respecting the needs of various stakeholders. The singular achievement of the committee is in reaching consensus for the ideal, rising above the political interests of individual committee members for the suboptimal. And in this, lies the strength of the Indian democracy.

Sushil Modi, the erstwhile Chairman of the Empowered Committee of State Finance Ministers, too, brought an extremely balanced perspective. He forged consensus amongst the states on various issues and brought the discussions on GST to the current level.

One of the biggest issues in the design of GST was achieving a balance between the fiscal autonomy of the states and the need for harmonisation of taxes across the common market of India. Gujarat and Madhya Pradesh objected to the GST predominantly on the grounds that it would mean a loss of their fiscal autonomy in raising taxes. The committee suggested that this autonomy be provided by allowing the states the flexibility to vary the tax rates within a narrow band, while preserving harmonisation of the tax base, administration, and a seamless information technology (IT) infrastructure for the GST. The states should also have the flexibility to opt out of the GST framework, just as they did when value added tax was introduced in 2005.

The committee emphasises that the collective decisions of the GST Council would be recommendatory, preserving the supremacy of the State legislature. But then, can individual legislatures ignore the decisions of the GST Council without inviting punitive action? If the role of the GST Council is only recommendatory, it can only at best serve as a platform for negotiations without making its decisions binding on the states. True, the power to enact lies with the legislature. But it can agree to abide by the decisions of the GST Council. Only then can the supremacy of the legislature be reconciled with the goal of harmonised GST.

The Committee emphasises that most design features be left to the discretion of the GST Council, and not embodied in the Constitution. At the same time, the Constitutional framework should be broad enough not to foreclose the flawless GST model, which was warmly received by the Committee. The GST scope should include all goods and services (including petroleum products and alcohol). There should be a common IT platform to simplify compliance. For India to truly become a common market, all distortionary taxes, including the entry tax, should be subsumed into the GST. All these features pave the way for the GST Council to usher in a flawless GST, hopefully at the inception itself.

While recommending that the constitutional framework should permit GST to be extended to all goods and services, the committee is silent on the treatment of real estate, which is neither a good nor a service. Without an explicit inclusion, real estate may remain outside the GST under the constitutional framework. This is certainly not desirable. Under modern GST enactments, such as those in Australia, Canada, Singapore, South Africa, and New Zealand, no distinction is drawn between goods and real property and the tax is extended to all in a seamless manner. This is also the feature of the flawless GST. Inclusion of real property in the base is crucial for the flawless GST rate to be brought down to 12 per cent, which the Committee found so attractive and was perhaps the single-most important factor in its recommendation for no items to be left out of the GST ambit.

So, where does the government go from here? Clearly, GST cannot happen before the general elections, given the time required for legislative enactments and other preparations. The next immediate step for the government is to table the revised Constitution Bill in Parliament. Will the government accept all the recommendations of the Standing Committee? Will it agree to a comprehensive base that includes all sectors such as petroleum, alcohol and real estate? Will it accept the subsumation of taxes such as the entry tax, entertainment tax and electricity duty? Will it allow the states to opt out of the GST? If yes, what would be the mechanism for the opt-out? Will the states that opt out be allowed to keep all of the taxes they currently levy, including the dreaded Central Sales Tax on inter-state sales? It remains to be seen how these issues would be addressed.

The Standing Committee's Report is an all-party endorsement of the GST and it would be unthinkable that the government, current or future, would oppose it. One hopes that the Centre would have the foresight to bring out an amended Constitution Bill, without any second thoughts about agreeing to the Committee's suggestions. For, this would be good for the country and a fitting tribute to the Indian democracy.

(The writer is Tax Partner, Ernst & Young. Shalini Mathur, Senior Policy Advisor, Ernst & Young contributed to the article. These views are personal)

First Published: Tue, August 13 2013. 21:44 IST