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GST is a big reform, the govt has to get it right

Last updated on: September 11, 2015 11:05 IST

The GST is, by definition, a destination-based tax. To add a one per cent tax on inter-state transactions is to violate the very principle of the GST, says Dorab R Sopariwala.

So, the goods and services tax (GST), like Parliament, is stalled and the Congress is responsible for stalling both of them - just as the Bharatiya Janata Party (BJP) was, when the Congress-led United Progressive Alliance was in power. One piece of shameless behaviour follows another. "Plus ça change, plus c'est la même chose."  

But that should give us time to examine the GST Constitution bill that is before Parliament.  

There is wide consensus in India that the GST is a good idea primarily because it stops the cascading of taxes, unites goods and services under one head, reduces leakages and brings more products and services into the tax net.  

A strong proponent of the GST, Adi Godrej has been saying for five years or more that it will add one per cent to India's gross domestic product (GDP).

Others have been saying that it might add even two per cent or more! And the evidence?

Probably the 2009 study by the National Council of Applied Economic Research, which states that GDP could increase by 0.9-1.7 per cent if a comprehensive GST were implemented.

So, what's the problem?  

Well, the problem is the usual one. It is an awfully crafted tax; a Constitutional elephant created in committee.

For the past seven-eight years, the GST Council has been trying to thrash out the problems.

Already there are compromises galore and one is left wondering what other surprises are in store.  

Some months ago, Finance Minister Arun Jaitley said the best was often the enemy of the good and that we should not look for the "ideal" GST in this first, hesitant effort.

That is certainly true but it is equally true that the bad is also the enemy - and a mortal one - of the good. Which is what this bill is. And the hoped-for increase in GDP was premised on a 'comprehensive' GST -not a moth-eaten, half-baked one.

The GST is, by definition, a destination-based tax. To add a one per cent tax on inter-state transactions is to violate the very principle of the GST.

Even Arvind Subramanian, the government's chief economic advisor, has spoken out against it.

The government now proposes some tinkering (such as excluding inter-company transfers across states) but that will create its own problems and more avenues for 'creativity' in tax arbitrage.

Does the government need to succumb to this demand, which militates against the very principle of the GST - particularly as states are now being fully compensated for five years?  

But the gorilla in the room is that electricity, real estate, petroleum products and potable alcohol are out of the GST net.

These 'left out' categories' taxes account for probably 40-50 per cent of states' revenues.

Thus industry does not get a set off for, say, their use of petroleum products etc and the cascading continues. Is it just my convoluted mind or do others also think that these four sectors are the ones that are cash cows for our political masters?

If India is to benefit fully from the GST, there must be a clear provision in the bill that ensures these four products do come into the net - even if they do so several years later.

Else, going by our record, it will never happen.

We are told that "all indirect taxes will be subsumed in the GST. India will be one common market. One country, one tax".

But each state is allowed to have its own GST bill and no law requires these laws to be in harmony.

And there appears to be nothing to prevent a state from having a different rate from others or imposing a 'temporary' surcharge during, say, a financial emergency, which could last for years (like the 'Bangladesh refugee' surcharge levied in 1972 on bus tickets in Maharashtra, which lasted for over 40 years!).  

Or, what do we do if a state imposes an additional indirect tax under another guise? And what happens if some states decline to give input credit on some products as they currently do under value added tax?  

The GST is an idea whose time has come.

This is a big bang reform and the government has to get it right not wholly or in full measure but very substantially.

A slipshod bill will result in the country paying a heavy price for this most significant attempt at reforming our indirect taxes.

So, the one per cent tax on inter-state transactions should go; there should be some way to ensure that, at some pre-determined stage (even if it is eight to 10 years into the future), the four major products enter the GST net; and the states should not be able to deviate by more than a specified amount from the median state GST rate.

While the GST is sacrosanct, April 1, 2016 is not. Getting it right is.

Let us delay it but let us try and get it right substantially, as we will not get it right fully.

If the BJP obtains the cooperation of the Congress by conceding on the one per cent tax issue and matters such as a Constitutional cap on the amount of the GST, then getting the bill through the states also should not be too much of a problem, as the two parties run around 60 per cent of the states by themselves and another few with allies.  

Let the GST begin.  

Let us debate, discuss and finally roll out a reform that the country can be proud of. 

Dorab R Sopariwala writes on political and economic issues

Dorab R Sopariwala
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