NOVEMBER 30, 2015

By Sumit Dutt Majumder

AS it seems now, the fate of the Goods & Services Tax Bill (the 122nd Constitution Amendment Bill) depends on the resolution of the issues raised by the Congress, the main Opposition Party. It is important for the Bhartiya Janata Party (BJP), the ruling party, to resolve these issues urgently so as to garner the Congress support in the Rajya Sabha. That is essential for getting the GST Bill cleared this Winter Session of the Parliament. It has been almost 10 years of long wait since Mr P Chidambaram, the then Finance Minister, had announced the Government's intention to introduce GST in his Budget Speech of February, 2006. And, for the first time the prospect of ushering in GST is looking bright. In the national interest, leaders of both the parties will have to show statesmanship, and come to an amicable settlement of the issues raised. The Prime Minister has now reached out to the Congress by inviting its President and the former Prime Minister for a dialogue on the GST issues which have been narrowed down to three. Lets have a look at the issues.

It may be recalled that GST being a destination based consumption tax, the States' share of GST will accrue to the destination state in case of inter-state movement of goods and services. At present, the origin states collect and keep the tax. Therefore, the predominantly manufacturing origin states have been complaining about the loss of revenue in the post-GST regime. In order to please such origin States, a provision has been proposed in the clause 18 of the GST Bill allowing them to levy an additional tax of one per cent, over and above the integrated GST (IGST), on supply of goods in the course of inter-state trade for a period of two years. This additional tax would be origin based, and so the origin state would keep this tax.

One of the demands of the Congress Party has been that this provision be scrapped. The demand is reasonable, as would be evident from the following discussion. This additional tax is against the basic principle of GST that the States' share of GST should accrue to the destination state. Secondly, non-availability of Input Tax Credit for this additional tax would lead to cascading of taxes, and that would add to inflation. Besides, this tax would entail additional compliance costs. In fact, this method of compensating the manufacturing states additionally is not at all necessary, since in any case, the Bill itself envisages compensation by the Centre to the States for five years in case of revenue loss in the GST regime. One reason for the Centre agreeing to the demand of the manufacturing States, could be that by allowing the States to collect this additional tax, the Centre would be reducing its own burden of compensation. Considering all aspects as discussed, it would be better if the Centre agrees to scrap this tax.

The Congress demand for an independent Dispute Settlement Authority (DSA) would need a closer look. Mr Pranab Mukherjee, the then Finance Minister, had presented the 115th Constitution Amendment Bill for introduction of GST in Parliament in March 2011. It had proposed at Clause 12 (Article 279B) setting up of a GST DSA 'to adjudicate any dispute or complaint referred to it by a State Government or the Government of India arising out of a deviation from any of the recommendations of the Goods and Services Tax Council constituted under Article 279A that results in a loss of revenue to a State government or the Centre or affects the harmonised structure of the Goods & Services Tax'. The Standing Committee of Finance led by Mr Yashwant Sinha who had examined the 115th Constitution Amendment Bill concurred with the views of some of the States that a separate DSA would interfere with the States' fiscal autonomy. It therefore recommended for omitting the aforesaid clause 12, and noted that 'it may be expedient to make a provision in Article 279A itself empowering the GST Council to decide about the modalities to resolve disputes arising out of its recommendations.'

The then Attorney General, however, had opined on the legality of the DSA that the question of the Parliament and the State Legislatures becoming mute spectators does not arise. The DSA is primarily with regard to the aspect of disputes in relation to deviation from any recommendation of the GSTC, and it is not just any deviation but a deviation which results in loss of revenue to a State government or the Centre, or affects the harmonised structure of the GST. Notwithstanding the decision of the DSA, the ultimate control over finance will always be that of the legislatures'. The learned AG had concluded that the supremacy of the legislatures over finance was not affected by the proposed amendments.

Under the circumstances, the question that arises is - should a person or body be the judge of its own action or recommendation? To bring fairness and transparency in dispute settlement process, it is imperative that the dispute is settled by a body independent of the GST Council. Further, the earlier Bill of 2011 provided for appeal to the Supreme Court in case any of the party to the dispute is aggrieved with the decision of the DSA, whereas the current Bill is silent on appellate avenue. Therefore, there is a need for an independent body, the structure of which need not necessarily be the same as proposed in the previous Bill. In light of the foregoing discussion, the Congress demand on this issue seems just and fair.

The third demand of the Congress is with respect to keeping the GST rate low, and capping it constitutionally. People across all sections have demanded the GST rate to be low so that it does not add to inflation. Howsoever efficient the GST machinery may be, the taxpayers would not welcome GST happily if the GST rate is kept high. The GST rate would normally be based on the Revenue Neutral Rate (RNR). The RNR would depend upon many factors including threshold limit, goods and services that are kept inside the GST ambit and the number of exemptions. These factors would determine the size of the taxbase which would impact the RNR. Internationally, the GST rate normally varies between 16% to 20%, with exceptions like Australia (10%), New Zealand (15%), Japan (8%), Germany (23%) and Malaysia (6%). France has four rates - the highest at 20% and the lowest at 2.5%, while the UK has two rates at 20% and 5%.

The task of determining the RNR and the possible GST rate(s) has been given to a panel of experts led by Mr Arvind Subramanian, the Chief Economic Advisor. The Government will have to wait for the Report before deciding on the GST rate. Therefore, the Congress demand for the GST rate of 18% seems premature. The Congress has further demanded that the GST rate should be capped at 18%, and that this rate should be incorporated in the Constitution. The concern of the Congress Party seems to be that unless capped constitutionally at 18%, in the coming years the Centre with the support of the required number of States could go on increasing the GST rate, thus adding to continuous inflation and resultant sufferings of the common man. This apprehension indicates a trust deficit between the ruling party and the Opposition.

But, the point to be considered is that the rate of duty is dynamic, and it will need to be changed at different times depending on the relevant politico-economic factors of the day. Once the GST rate is inscripted in the Constitution, the Government would have to go through the arduous route of Constitution amendment each time the GST rate needs to be raised beyond the capped one. It has been argued in favour of the capping that once there is indeed a genuine ground for breaching the cap, and the Centre and the States agree to do so, the amendment of Constitution should not be difficult. It has been further pointed out that capping the GST rate at 18% would deter the Centre and the States from breaching the cap frequently.

Considering the pros and cons of the issue, it is believed that a constitutional provision for capping GST rate would not be a sound step. The Congress would need to be persuaded not to insist on this demand. Having said that, the ruling party may also consider some other means of reassuring the Congress that the GST rate would not be enhanced frequently to the detriment of the common man's interest.

One collateral idea is also struggling for a backdoor entry; - if the Centre fails to get the GST Bill passed in the current Winter Session, the Government may consider having its own Central GST by subsuming the central indirect taxes. Introduction of CGST, leaving aside the States, would not require constitutional amendment. Having waited for long 10 years this Plan B may simply be an eye-wash. This would not eradicate the present ills of the indirect taxation systems of both the Centre and the States like cascading of taxes; high compliance costs arising out of multiple taxes and multiplicity of taxmen; rates war in State VAT and the absence of common economic market. This would have been worth consideration as an incremental reform about two or three years back. But having proceeded so far, the Centre should not go into a reverse gear. Rather, it is the right time now for Mr Arun Jaitley, the Union Finance Minister, to make all-out efforts to have a compromise with the Congress by accepting their first two demands and convincing them to relent on the third demand for capping of the GST rate. Let's hope that the thaw at the start of the Winter Session leads us to a free-flowing river of GST reforms through the warmth of national interests, the winter chill notwithstanding.

(The author is former Chairman of CBEC. He has authored a popular book titled 'GST in India' and also the Consulting Editor to TIOL)