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This GST is no reform, and the Rajya Sabha must not pass it

The current draft of the Goods and Services Tax could kill any hope of economic revival - and you should blame the Congress if it rolls over and lets it pass

Mihir S Sharma  |  New Delhi 

The Goods and Services Tax, in the version that has just been passed by the Lok Sabha, is a disgrace. It does not deserve to be called a ‘GST’, for it violates most of the sensible economic principles upon which such taxes are built. It may even be worse than the system it replaces. It is certainly no real reform, and the Rajya Sabha must not pass it in its current form.

Here is what the GST is supposed to do, as I say in my book ‘Restart’:

This is completely revolutionary, the sort of economic backroom plumbing that can change your life without you even noticing. It means that every commercial establishment will find it slightly easier to pay taxes – and also, they will discover, it’s become slightly more difficult to avoid doing so. It means that there will be, hopefully, more in common between the taxes you have to pay in Maharashtra and Madhya Pradesh than there has been so far. Another thing that’s been keeping companies small is that moving into another state is a tremendous expense. You need to follow an entirely different set of regulations – but also a completely different set of taxes. Not to mention the fact that your truck has to wait for a week at the border to pay taxes to cross. Properly implemented, the GST can change all that, and replace all this confusion with a simple, common tax rate that’s easy to pay. Hopefully, that will increase tax revenue sharply.

Is this what the Constitutional Amendment Bill passed by the Lok Sabha will do? Sadly not. Yes, there might be the beginnings of a single rate, and importantly, a single architecture for taxes and deductions. But most of the benefits will be denied us in the current draft.

Here is part of what went wrong: the Centre has not tried hard enough to convince some states to give up their right to raise taxes from tobacco, petroleum and alcohol. These are big money earners. Last year, taxes on alcohol represented 22 per cent of Kerala’s revenue; and petroleum is 35 per cent of states’ revenue. The tragedy, however, is they therefore represent equally big holes in the GST’s coverage. The GST works only if it is universal, a chain of taxes and offsets that allows every transaction to fit smoothly into a whole. The moth-eaten tax the government has delivered promises no such thing. Further, if you exclude such big items, the single tax rate under the GST required to keep government revenue the same after it is introduced could go up sharply. (More on that later.)

The exclusion of real estate from the GST would cause more problems. In the words of industry chamber ASSOCHAM, “it would mean that credit would not be available for the input used in construction of factories, offices, civil structures and even plant and machinery which may be considered a part of real property, being attached to land.” This would not just be a further giant hole in the system, it would be a step back, given real estate was part of the value-added tax system. And it is desperately important for the fight against black money for real estate to become part of a coherent tax chain. (Once again, this government seems unwilling to take real action on black money.)

Also, several local levies have been kept out of the GST, suggesting that a truly unified national market is still some distance away. But that’s not the biggest problem. The biggest problem is this: an additional, non-creditable tax of 1 per cent on the inter-state movement of goods. This tax on inter-state commerce runs against absolutely everything the GST stands for. It means that inter-state trade will not be seamless, and we may continue to see lines at borders and compliance difficulties. Worst of all, as my editor A K Bhattacharya writes: “Imports would get a fillip as they would not be subjected to the additional tax, whose multiplier effect, every time the goods enter a new state, would be substantial, dealing a blow to the government's 'Make in India' programme.”

How did we wind up here? There is blame to go around. The previous United Progressive Alliance government didn’t strike the GST deal with the states when times were good – perhaps because it had two finance ministers whom nobody in the states trusted. Pranab Mukherjee gave the impression of being more interested in tax demands than tax reform. And P Chidambaram, though apparently a reformer, was feared and distrusted by most in the states as inveterate centraliser. The UPA simply didn’t have the credibility by the end of its term to finish the job. Its primary opponent: a certain Narendra Modi, who as an anti-GST Gujarat chief minister was the man most responsible for holding up the reform.

Now that Modi is PM, the Gujarat problem has, amazingly, not gone away. The tax on inter-state traffic is in response to demands, in fact, from Gujarat and Maharashtra in particular. These two are “producing” states. Currently, they get to tax goods produced in their territory. But instead, under the GST, “consuming” states, like West Bengal, will get to tax the goods produced in Gujarat but consumed in Calcutta. Gujarat has refused to give up its right to tax those goods – and thus will tax them as they leave Gujarat on their way to Bengal. Of course, they have been promised enough compensation by the Centre for their revenue loss. But we are struck with the startling fact that the government of Anandiben Patel does not trust the government of Narendra Modi sufficiently to give up its demand for tax instead of compensation.This lack of trust has managed to derail the GST.

I hesitate to blame the poor beleaguered prime minister excessively. Perhaps he has not been properly briefed by his officials, or by the finance minister. But the fact remains that, as CM, Modi delayed the GST and, as PM, he has destroyed its potential. The worst part is that it is not to bow to the opposition that he did so: but because he could not persuade his own party CMs, Patel of Gujarat and Fadnavis of Maharashtra. So much for strong leadership!

I will not blame the poor PM for this. He seems in over his head on this issue. I will instead blame the Congress, which failed to push the GST sufficiently when in power, and now seems to have rolled over and decided to allow it to pass Parliament. This is unacceptable behaviour from a Parliamentary opposition that surely knows that passing the GST in its current form will hurt, and not help India. In the Rajya Sabha, the Congress must correct this cowardice, and stand up and demand answers: why is the government not working to give India the GST it was promised?

For this is the disaster that is looming: Not only will the GST as currently planned not help to stitch India together into one economy, this GST may well cause the tentative growth recovery to falter and collapse. We do not know what the final rate of the GST, decided by the “GST Council” will be. But it is feared that the “revenue-neutral rate” – the tax rate that will ensure no loss in pre- and post-GST revenue to the government – will be between 22 per cent and 26 per cent. (It may even be 27 per cent.) We don’t even know what the rate is, and the government has been arrogantly refusing to come up with a reasonable model to tell us.

But it looks almost certainly as being far higher than the 12-16 per cent we were earlier promised, the number which had led many to suppose it could up GDP growth by a percentage or two. In fact, it could wind up being much, much higher than current tax rates, and higher than India’s global competitors.

This tax rate could kill demand, growth, and the recovery. It could kill exports, and ‘Make in India’. It could kill the chances of compliance improvements, expansion of the tax net, and the reduction of black money and the informal economy.

And if, instead, the tax rate is kept lower than the revenue-neutral rate, it could then kill the government’s efforts at fiscal consolidation, and bring the wrath of global capital down on us.

If the government is determined to try and pass the GST on its timeline, in spite of its failure to convince its own state leaders to write a decent law, then the Opposition must stand up and prevent a Bill that may grievously hurt this country’s economy from being passed as-is.

Twitter: @mihirssharma

First Published: Wed, May 06 2015. 20:46 IST