JULY 05, 2017

By TIOL Edit Team

"NEW dawn at midnight: GST transforms India into a single market". Similar headlines to GST launch splashed in media ring in similarity with Pandit Jawaharlal Nehru's India's Independence speech –'Tryst with Destiny'.

For Finance Ministry, GST' midnight launch is crowning glory to the 18-year blow hot-blow-cold journey of GST. Its GST logo 'One Country, One Tax One Market' is however, over-simplification of indirect tax reform. Moreover, GST alone can transform the country into one single economic market. The market for factors of production and products is constrained by too many policy and regional bottlenecks.

GST should thus be viewed as first stepping stone to economic integration of India into a single, common market as would be elaborated later in this editorial.

Consider first the ceremonial and historical significance of the launch function.

An official release says: "The Goods and Services Tax came into force at midnight, amid a historic midnight session in the Central Hall of Parliament. President Pranab Mukherjee, Prime Minister Narendra Modi, and Finance Minister Arun Jaitley addressed the gathering, before the President and the Prime Minister pressed a button to mark the launch of GST".

On 14th August 1947, Mr. Nehru had stated in Parliament: "At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom".

On 30th June 2017, Mr. Modi said: "Just as Sardar Vallabh Bhai Patel unified India by helping several princely states subsume into a common entity, the GST will bring economic unification. If we take into consideration the 29 states, the 7 Union Territories, the 7 taxes of the Centre and the 8 taxes of the states, and several different taxes for different commodities, the number of taxes sum up to a figure of 500! Today all those taxes will be shred off to have ONE NATION, ONE TAX right from Ganganagar to Itanagar and from Leh to Lakshadweep."

He added: "GST is the taxation system of New India; of the Digital India. It is not merely ease of doing business. It is demonstrating way of doing business. GST is not just a tax reform, but it is a landmark step towards economic reforms".

GST has traversed a bumpy political ride ever since it was first mooted by an expert group way back in 1999. Its journey has transformed integration of 15 central & state taxes & related surcharges & cess into complex 7-rates GST plus 'compensation cess' The computation of GST plus differential cess on specified products transforms into many tariff rates. GST is thus hydra-headed tax as compared to simple, three-slabs tariff originally envisaged.

Five cash-minting petroleum products- crude oil, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel have been 'temporarily' excluded from GST. So is electricity. The exclusions constitute a very big chunk of gross domestic product.

The exclusion is thus itself tax on energy efficiency of Indian economy. It hamstrings the potential of GST to improve productivity and efficiency of all sectors of economy. GST would remain one-leg tax, from standpoint of efficiency, as long as exclusions persist.

Notwithstanding complexity and lame-duck features of GST, it deserves big applause. This is because half loaf is better than no bread at all amidst fractured polity. After GST implementation stabilizes, GST Council should prepare a road-map for reforming GST.

The Council should prepare timelines for subsuming into GST the central, state and local taxes that have been excluded at present. First reform should be elimination of GST compensation cess as soon as possible.

Let cess be integrated into GST even at the cost of increasing the number of 7 rates from zero % to 28% to say 10 rates 35%, 50% and 60%. Even if the rates are more, there would be simplicity in computation.

As for non-tax factors that impact economic integration of the country, the Inter-State Council should issue a white paper on this as national, regional and local hindrances are too many.

A few instances would suffice. The country does not provide for free movement and employment of labour, which is vital factor of production and provision of services. Certain States such as Maharashtra reserve a lion's share of the potential jobs of industrial units to domiciled residents. State Governments stipulate jobs reservations on this count in the approval letters that they issue to promoters of proposed industrial units.

These reservations are in addition to caste, religion, gender-based reservations stipulated by the Centre and the States. The labour component of so-called one country, one market is thus highly reservation-skewed.

Certain States follow discriminatory stance on setting up of industries. A notable case is Goa Government's decisions to scrap half a dozen special economic zones (SEZs) in the eighties and put a freeze on SEZs. Goa does not want migrant workers to flock to its territory in search of jobs in SEZs. Hence no SEZ stance.

States have also imposed restrictions on movement of farm commodities and minerals. A notable instance is West Bengal's decision in 2013 to suspend transport of potatoes outside State to bring down potato prices in its territory.

All such instances and decisions that transform India into fragmented market segments for different economic activities should be eliminated to let GST unleash its full potential as driver of inclusive growth, efficiency and productivity across the country.