Why the Goods and Services Tax needs to be capped

The new Goods and Services Tax (GST) the country has been trying to introduce as an indirect tax reform measure for a decade now has at its heart an aspect of revenue neutrality.

This aspect of revenue neutrality is understood to be a GST rate that would leave the Centre and the states with no loss of revenue following the new regime of taxation proposed in the Constitution (122nd Amendment) Bill 2014.

Originally many thought it better to specify the GST rate in the Constitution Amendment Bill itself so that the rate mutually decided upon between the Centre and the states will be binding on both and therefore, will remain unaltered for a reasonable period of time.

Also read: Decode GST now or regret it later

Then again, a set of clever people suggested that writing it into the Constitution will carry with it the condition that any revision will have to be ratified by 2/3rd majority in the Upper and Lower Houses of Parliament and therefore, must be kept out of the Constitution to enable manipulation of the rates by the Centre and states when required.

In fact, it was the principal Opposition party in Parliament - the Congress - that suggested fixation of the GST rate and mentioning it in the Bill as a pre-requisite for it to vote in the Bill's favour in the Rajya Sabha where it has more numbers than the present BJP government.

The Congress also had other demands such as

1. An independent dispute resolution machinery for resolving GST disputes between the Centre and states and between States.

2. Dropping of the one per cent additional tax meant to compensate the manufacturing states for a period of up to five years from the date of introduction of the GST.

Also read: India wants GST, why is Congress against it?

Now, after stalling the Bill for nearly two years for want of consensus on its three major objections, suddenly the Congress appears ready to support the Bill in the Rajya Sabha on being satisfied about the favourable consideration of its two subsidiary demands though not the principal one of casting the GST rate in stone, as one of its senior leaders would like to put it.

The party has come up with a new explanation for its members in the form of a note to be read in Parliament that the provision of adequate band rates to the Centre and states would take care of revenue neutrality of the GST.

This is to explain away its earlier demand to stall the Bill. Instead, it is suggesting an option in the form of band rates to protect the revenue of the Centre and states and as well to preserve the sanctity of the revenue neutral rate (RNR).

Let us briefly understand what the RNR is all about. The first question that anyone would like to ask about the RNR is: should something described as neutral not be neutral to everyone?

It is an adjustable rate to protect the government against a possible fall in revenue owing to the introduction of the new tax regime. But how will it deal with a possible increase in the cost of the commodities and services for the consuming public?

The producers and service providers are not much in the reckoning as everyone knows that under the new tax regime they will be merely passing the parcel of taxes from one hand to another. The consumers at the end point will be the last to be caught with the whole parcel of goods and services plus the taxes.

Now, in this new game change, in which the consumers have been made the receivers of the "parcel", should the rate not be neutral to them? Why should the revenue only be neutral to the government and not the consumers? It is evidently a one-sided rate where no interests of the consumers find any representation as of now. The RNR is said to be a rate at which the Centre and states would make just about enough revenue not to win or lose compared to the pre-GST scenario.

It is not really a pure RNR since the Centre has kept petroleum and tobacco products out of the GST basket and kept it with it and the states similarly have kept with them petroleum products, electricity and potable alcohol.

When questioned about this, people say we should not sacrifice the good for the best and so on.

The big joke is that no one knows what is good and what is best. If you introduce GST in a country like India, or introduce the perfect GST, it would be possible to perfect it later, says the world VAT/GST expert Sijbren Cnossen of the University of Pretoria.

It is not that there are no countries among the 150-odd nations having VAT/GST around the world that have not written the rate into their constitution.

However, if it is not to be written into the constitution, let us specify that the GST rate will remain constant at least for five years, which is the period for which a government stays in power in places like India.

As a parting note, let us make a perfect GST by subsuming all goods and services and all taxes into one GST basket and come up with a real revenue neutral GST rate to have a real pan-India market to spur production and consumption and not simply explain it away by revenue neutral band rates which are not to be found in any text book of international VAT/GST law.