The 1% additional tax could unravel the PM's plan
It is unfortunate that the Opposition parties continue to play an obstructionist role, and walked out of Parliament when finance minister Arun Jaitley moved a constitutional amendment to allow the passage of the GST Bill. The parties have justified this by saying they have not had time to examine the amendments—India has been debating the GST for over a decade now—and have, not surprisingly advocated the Bill be referred to a Standing Committee first. That the Opposition should choose to behave this way is odd since considerable work got done before Parliament closed for a break. Even odder is that parties like the Samajwadi Party and the Trinamool joined the Congress in walking out since it is the ‘consuming’ states like Uttar Pradesh and West Bengal that benefit the most from the Bill—indeed the biggest opposition to GST has, traditionally, come from the ‘producing’ states like Gujarat and Maharashtra which would see their CST revenues fall once GST is introduced though, over a period of time, this will be more than made up by higher GST revenues.
There is, however, a fundamental flaw with the Bill that needs to be fixed, though it is unclear whether this would be fixed at a Standing Committee level. And that is the 1% additional tax that has been granted for a period of two years, to placate the ‘producing’ states—several states, news reports suggest, are still holding out for 2%. There are two problems with the tax. For one, since the states are anyway to be compensated for their ‘losses’, there is really no rational explanation for why the 1% tax had to be introduced. Two, the tax may not end at the end of 2 years since the Bill says the period can be extended by the GST Council—the Union finance minister, it has to be kept in mind, does not have veto power in the Council. Since the real benefits of the GST—the 2% of GDP that the finance minister spoke of—will flow only once tax rates get lowered, the presence of the 1% tax will only add to overall costs. And the way Section 18 of the Bill has been drafted, the 1% tax is to apply to all ‘supply’ of goods, not ‘sales’. In other words, if there are branch/stock transfers within a company but across state boundaries, the tax will be applicable to this; given the large number of inter-state transfers within firms, this could raise the tax level to as high as 5%.
An equally big problem is that relating to real estate. Since this has been kept out of the GST, this means there will be no input tax credit on items like cement and steel that are used in the construction sector. Given how construction capex is around 35-40% of all capital investment in the country, this is a very big area being kept out—in other words, like the input taxes in the petroleum sector that has also been kept out of the GST, this will also be un-rebated tax or a dead loss to the economy. Until all the economy is covered by the GST, and this will take years, the 2% benefit being talked about is not going to materialise—and the 1%-type taxes will only add to the delay.