Hovering at 7.5% in GDP today, the passage of the constitutional amendment bill for GST in the Rajya Sabha on 3 August heralds the potential to add 2% to it via the implementation of this legislation alone.
The leaky and cumbersome tax-on-tax regime will, by December 2016, be replaced by a single “common market” tax, with great potential for broader compliance via its IT based implementation architecture. With better monsoons likely not just this year but for another two years going forward, another percentage point in agricultural/rural income can safely be added to the tally.
With a projected acceleration in business, industry, manufacturing, services, infrastructure, and agriculture/related rural constructs, forming a virtuous cycle; it may well be possible for India to iron out its cyclical economic volatility as well.
With a double-digit growth stabilising in one of the largest economies in the world, with immense unrequited demand potential for decades going forward, India has the prospects of an unblemished run similar to that experienced by China with Deng Xiaoping at the helm. Except, that our growth will most likely be driven by domestic demand instead of exports.
Finance Minister Arun Jaitley launched the seven-hour long debate on GST in the Rajya Sabha by characterising it as the most significant tax reform since independence. In saying this, Jaitley emphasised the simplicity and efficiency of this one nation, one indirect tax being ushered in now.
The breakthrough was prior-enabled by extensive discussions to arrive at an informal consensus. The Congress, as the originators of the earlier versions of the Bill starting more than 10 years ago, was, as expected, centre-stage. And while a huge number of uncertainties, unclear meanings and teething problems are clearly expected in the GST implementation, its desirability and potential to be transformative was recognised by all.
And now that the constitutional amendment with changes has been passed, it will be harmonised with the previous version in the Lok Sabha from earlier this year and passed again there, before being ratified by at least 15 out of the 29 states. Then the specific tax rates applicable and final inclusions and exclusions will be legislated around November-December 2016, prior to implementation perhaps as early as 1 April 2017.
The tone of this historic Rajya Sabha debate was cooperative, if apprehensive, with many speakers anticipating revenue losses at first. This is new territory, even though GST legislation has been adopted in a number of countries already. Former Finance Minister P. Chidambaram admitted that indirect tax collections overtook direct taxes in 2006—natural when it addresses under 1% of the population. And though indirect taxes are considered “regressive” in theory, because they fall with the same strength on the rich and poor alike, it is today what the Indian government lives on, both at the Centre and in the states. Chidambaram and most others pushed for no more than 18% as GST. He cited developed countries which charge 16.8% and developing/emerging nations that charge an average of 14.1%. This, even though it wasn’t capped in the constitutional amendment, after much prior wrangling. Jaitley clarified that the states were currently realising revenues at 25-29% in toto, and were not willing to be capped at 18%.
Several members also demanded an equitable, “revenue neutral rate”—meaning that a state should keep on taking in the same amount of indirect taxes that it does at present. Paradoxically, Chidambaram and others also felt that rates higher than 18% would stoke inflation, even though current cumulative revenues are in effect higher.
Most of the Opposition wanted an assurance from this majority government that the nitty-gritty of the GST—namely the dividing of the spoils between the Centre (CGST), the integrated GST (IGST)—should not be rammed through as money bills. Jaitley refused to foreclose on future options, but said he would strictly conform to constitutional provisions and the suggestions of the empowered committee that would draft the legislation. After some to-ing and fro-ing, the Congress agreed.
The AIADMK was the sole outright dissenter, saying that GST was unconstitutional and unfair to the states.
Some felt the Centre had a tacit veto power on the detailed provisos, though Jaitley rejected the contention, clarifying that it was incumbent for both Centre and states to work together.
Sitaram Yechury, true to form, warned the implementation of the GST should not end up blatantly favouring the “dollar billionaires”, instead of the 90% of households who earn less than Rs 10,000 per month. He also wanted not just a “revenue neutral rate”, but a “fair revenue rate”. Yechury’s formula, echoed by some others, would put pressure on the fiscal deficit, as the Centre might have to borrow more to pay for huge shortfalls if the revenue collections are set too low. Some demonstrated their ambivalence to this unified tax by wanting freedom for states to impose additional levies, particularly on tobacco.
However, the success of the GST going forward rests not so much on the haggling and the complexities of the coming fine-print, but the demand push of a dynamic country of over 1.2 billion people. India will have an ever growing appetite for more goods and services for decades to come.
Anand Sharma, former Commerce Minister, and leading Congress interlocutor on GST, somewhat bitterly reprised the years of political rather than substantial opposition this legislation has had to face from the present government when it was in Opposition. But he also went into the exclusions from the purview of the GST in its present amended avatar and questioned their logic. Jaitley, however, said no state of the union was willing to countenance the GST Bill in its 2011 form, because it didn’t pay compensation for shortfalls and the UPA government had not paid Central Sales Tax (CST) amounts to the states as promised between 2010-12. These had to be made good by the NDA since 2014, as a prior condition for the states, including the BJP ruled states, to come to the table.
In the medium term, GST revenues will rise substantially and its passage will be noted by foreign investors as a signal that India has embarked on its second stage of structural economic reforms.
The knock-on effect on the confidence in the Indian economy going forward will have a beneficial effect on marquee government programmes such as Make in India, Skill India, Start-Up India and so on. Our endeavour to manufacture a proportion of our $150 billion defence purchases, the largest such shopping list in the world, is likely to also receive a fillip.
It is a happy day, when an essentially bureaucratic polity like India takes a definitive leap of faith like this to meet its promising future square-on.