Modi must walk the talk on GST

Even if one doesn’t buy everything that Prime Minister Narendra Modi claimed in his Parliament speech on Goods and Services Tax (GST), one should acknowledge that this is one of the most crucial structural indirect tax reforms in the last 25 years of liberalisation.

This may not effectively clamp down on inspector raj, or turn the consumer into king, but it will at least provide a reasonably modern and synchronised indirect tax system to the burgeoning Indian economy.

As more than a dozen states have quickly ratified the constitutional amendment, now GST needs strong political leadership to spearhead its creation and implementation. 

If the Prime Minister really means what he said on the floor of Parliament, he should lead this reform to ensure a truly pragmatic GST in a time-bound manner.

Despite the pedigree of strong political differences, surprisingly, Parliament’s approval to GST came with three unique premises, which no reform of this size (including at the Centre and all states) has ever got before.

First, the GST Bill, passed by exceptional accord in Parliament, includes all recommendations of states’ empowered committee and the Centre’s consent. 

The predecessor of GST, i.e. VAT (value added tax), did not have the luxury of consensus in 2005. Seven states including Gujarat, Rajasthan, Madhya Pradesh and Uttar Pradesh had not implemented VAT in line with the rest of the country. These states came on board later.

Second, the country will get a powerful federal committee (read GST Council) for the first time in which the collective powers of the states are greater than those of Centre. This is the first experiment of its kind in the Indian federal system and may well become a model for policy dispensation in future.

Last, states have been ensured against probable revenue losses on account of GST’s implementation for full five years. With constitutionally guaranteed revenue protection to the states, GST could become a radical reform friendly to consumer, traders and industry, in chorus.

How can GST become a structural reform? As the Union finance minister will lead the GST Council, the central government’s political leadership has to ensure the following on the way to GST becoming a reality.

First: If Modi really wishes for the consumer to become king, he will have to create a political consensus to keep the standard rate of GST at 18 per cent. In the states, the standard rate for VAT is 14.5 per cent. Sixty per cent products come under it, while the central excise’s 12.36 per cent rate is applicable to most products.

Also read: What needs to be done to get GST right

The service tax rate is 15 per cent. If after merging these three, an 18 per cent rate for GST is established, it will be GST’s greatest success. Under it, tax will increase on certain products and services, but the merger of some other taxes will balance it and help it keep a check on tax-driven inflation.

The central government can persuade states to make GST demand - and consumer - friendly by using the ploy of five years’ compensation package against possible revenue losses.

Second: Land, energy and fuel are major factors which decide the cost of any economic activity. However, electricity, petroleum products and stamp duty are outside the ambit of GST.

Business can’t be competitive without reducing tax on these inputs. The GST Council must ensure under a three-year work plan that taxes on land, energy and fuel are brought within the ambit of GST.

Third: The Centre will have to ensure GST does not increase cost of compliance. The GST draft bill is fearsome. It proposes a plethora of assessments, registrations, returns and penalties. If these provisions are not done away with, GST can explode into unprecedented tax terrorism.

Fourth: For sanitation, basic infrastructure and other needs, local bodies need resources. Under GST, several such taxes will be merged with the state GST, and result in major loss of revenue for local bodies.

Also read: Why GST may stoke inflation in the short-run

The GST Council will have to devise a statutory formula, similar to Centre-state tax-sharing, for fixing local bodies’ share in states’ revenue kitty.  

Fifth: Moving forward on GST, the Centre will have to look for ways of increasing non-tax revenue and reducing expenditure in states. The Niti Aayog and Finance Commission can provide the leadership for it. 

Sixth: Foundation of GST has been laid at the political level without effective involvement from consumers, small-big industrialists, traders and local bodies, the key stakeholders to GST. Now, the GST Council will have to actively involve all stakeholders at every level of discussion.

Enthusiasts may be found saying that a weak GST is better than no GST at all, but not having a GST is better than having an awful GST, which may create more problems than it seeks to solve.

GST is an initiative of utmost importance in the second generation reforms in India, and so far only its foundation has been laid. With GST now approaching the drawing board, Modi is on the cusp of making history.

He has to play the role PV Narasimha Rao did in 1991 to guarantee a modern, simple, less inflationary tax system for future generations.