RS panel offers solutions, plenty of hard work ahead
Though the fate of the GST Bill remains uncertain with the AIADMK also submitting a dissent note along with theCongress party, the government would do well to accept the major recommendations of the Rajya Sabha (RS) Select Committee and use these to try and get the Bill passed in the RS. Even if the Bill does get passed—it will be touch-and-go since Congress and AIADMK alone have 79 seats in 245-member Rajya Sabha—the government will still have its work cut out since the Bill is hugely flawed. The biggest flaw was the 1% additional tax on inter-state transfers—this would have added 5-6 percentage points to the overall tax burden as goods moving across states would have to pay the tax at each entry-point, and would hit Make-in-India since it does not apply to imports. The RS panel has suggested removing inter-branch transfers from this—since roughly 75% of all inter-state transactions are inter-branch stock transfers, this will largely mitigate the impact of the 1% tax. Also, since the Centre was pushing the 1% tax as part of its cooperative federalism agenda—producing states like Gujarat and Tamil Nadu wanted this as they feared their tax collections would be hit—their fears will be assuaged if the Centre agrees to the 100% compensation suggestion of the RS committee as opposed to the graded compensation it was offering earlier of 75% and 50% in the fourth and fifth years. If the Centre accepts the 100% compensation, it can even agree to the Congress’s main demand of scrapping the 1% tax altogether, and perhaps bring it on board. The Congress’s other demands, like bringing in tobacco into the GST earlier, are also welcome ones, though it is unlikely the BJP would accept these for fear of alienating some states.
Tax experts like Satya Poddar have warned of the dangers of keeping various sectors out of the GST. If real estate is kept out of the GST as is planned right now, this means there will be no tax credit on steel and cement, for instance, so this will act as a disincentive to investment—the construction share of India’s annual capex of R25 lakh crore, he estimates, is roughly R8 lakh crore. Similarly, when electricity is kept out of GST, there will be no rebate of the taxes paid by solar and wind-power producers while setting up their generating units; losses on account of not bringing in alcohol into the GST framework are estimated at R15,000 crore, and taxes paid by refiners will not be refunded if petroleum is kept out of the GST net. All told, Poddar estimates, a third of the potential tax base is being kept out of the ambit of GST in its current form; this, in turn, will hike the revenue-neutral-rate of GST and so reduce the gains to be got from introducing GST.
The government’s game plan is to get GST going by agreeing to various exemptions—when GST starts delivering, the hope is, states will agree to bring other sectors like petroleum, electricity, alcohol and real estate into the GST net. Which is why the Centre will have to reject the AIADMK’s demands of reducing its vote-share in the GST council to 25% from the present 33%—if done, this will remove the Centre’s power to veto any scheme of the states in the GST council. The states will be free, in such a situation, to simply extend the 1% additional tax indefinitely. In even the current Bill, if the Centre does not stand firm two years from now, the 1% tax has a good chance of getting extended. In other words, while getting the GST Bill passed through Parliament is going to be a tall order, getting GST to actually deliver is going to be an even tougher job, requiring constant vigil by the Centre.