Former finance minister P Chidambaram, who first announced plans in his 2006-07 budget speech to shift to a new indirect tax regime, has said there is a still a long way to go before the unified goods and service tax (GST) becomes reality.
The Congress had sought an assurance from finance minister Arun Jaitley that the subordinate legislations which will bring the new tax regime into effect be not introduced as money bills. The demand is rooted in the fear that the government could bypass the Rajya Sabha, where it does not have a majority, by bringing in subordinate GST legislations in the form of money bills.
The Upper House on Wednesday passed the landmark 122nd Constitution Amendment that paves the way for implementing GST amid last-minute wrangling on details. Chidambaram spoke to HT on Thursday on a range of issues relating to the omnibus GST.
I wouldn’t want to question their intentions at this stage. The government has a majority in the Lok Sabha. And presumably, along with friends and allies, they have a simple majority (needed to pass subordinate legislations) in the Rajya Sabha as well. In fact, one must presume the government has a simple majority in both Houses. If they have simple majority in both Houses, and their intent is to have genuine debate and discussions on the bills to genuinely seek the opinion of the Rajya Sabha, which is the council of states, they should not hesitate to bring these as financial bills. Perhaps the finance minister was reluctant to make a statement yesterday because he may not have consulted the Prime Minister. If their intentions are transparent and bona fide, there is no reason why they should not bring it as financial bills.
Do you still have any political bargaining power left on the issue?
Let the bills come and we will tell you what bargaining power we have. If they are brought as financial bills we would debate and vote on them. There is no provision in the Constitution that requires them to bring a bill as a money bill. He can bring a bill without seeking the Speaker’s certificate that it is a money bill. I am not denying that Tax changes are brought as money bill. What I’m saying is that GST bills are too far reaching, too transformational, too important as laws to be brought as money bills to avoid a discussion and vote in the Rajya Sabha.
So, what is the road ahead?
The road was never easy for the GST law. It is a very, very complicated exercise. We knew that in 2006. We know that today. In order to negotiate this very difficult road, the government’s approach should be one of conciliation and negotiation. The last two weeks showed that they had acknowledged that the path forward is a path of conciliation and negotiation. I hope they continue to remain on that path.
You have suggested that the standard GST rate should be capped at 18%. Why?
I have reflected the well-argued report of the committee headed by the Chief Economic Adviser that’s based on sound economic facts and logic. The committee led by the CEA consisted of representatives of the level of principal secretary of Tamil Nadu and Kerala, Gujarat, Karnataka and the department of revenue of the central government. They have laboured over many months and produced a 96-page report. The government has not rejected the report. So why should I not accept the report. The CEA is not any economist; he’s the chief economic adviser to the government.
The response to this line of argument is that states have not accepted the report yet.
This is a not a report for the states. This is a report for the central government. But it was prepared by representatives of state governments also. The political mind of the government, I presume will be sensitive to the threat of inflation. But one has to wait and see whether the government has the persuasive powers to carry the state finance ministers with them and whether they have the administrative acumen to overrule Doubting Thomases in the department.
There is also a view that capping the rate will bring down taxes on ‘demerit’ goods like alcohol?
Not necessarily. The cap refers to the standard rate; cap is shorthand. What we are saying is that you stipulate the ceiling for the standard rate. The standard rate according to the CEA should not exceed 18%. Then for merit goods, you have a lower rate and for demerit goods, you have a higher rate. If the standard rate is X, you can have X- for the merit good and X+ for the demerit good. All this is argued in the report.
You are the original author of this reform. How confident are you about the April 1, 2017 deadline being met for GST’s rollout?
Much of these clauses were drafted when I was the minister. I think there is a lot of work to be done. There are many, many milestones to be crossed. I would be pleasantly surprised if they can cross all these milestones in three months. Two laws have to be passed by Parliament. One law modeled on the model GST law has to be passed by 29 state governments. The GST Council has to be established. The Council has to establish a dispute resolution mechanism. The Council has to agree on the rates and recommend the rates to the Union government and the state governments. Then the governments must make up their minds about what rates will find a place in the bills. These (steps are needed) on the legislative side. On the administrative side, the GSTN network has to be fully established. I am told that the Central Board of Excise and Customs (CBEC) have appointed a committee to look into the readiness of the GSTN. Apparently, it is not fully ready. Once it is ready, it has to be pilot-tested. It has to be tested in live conditions. It is not a switch that you can put on and the GSTN network will come to life on April 1 or any other day. It has to be tested in live intra-state transactions and live inter-state trade in goods and services and live trade in goods and services during the course of import.
There is a fear that GST will make services costlier?
Of course! Even if you fix it at the standard rate of 18%, it is an increase of three percentage points over the current level of 15% of service tax.
What about product prices?
It depends on how many people register, how many transactions are captured in the GSTN. It is work in progress. It is not that everything is going to fall in place in the first year. There will be glitches, there will be difficulties. That I can foresee. So, one should not lose heart. One should persevere. There will be glitches, there will be setbacks, and, maybe there will be some revenue loss. The chief economic adviser anticipates revenue loss in the first few months. That should not lead to a knee-jerk reaction.
How does one convince states that have been demanding a higher cap?
That is the burden the finance minister has to carry. He has to convince them that exemptions will be more limited, efficiency will be considerably enhanced and tax evasion will be considerably lower. Therefore, a lower standard rate will ensure that their revenues are protected. The chief economic adviser has calculated the revenue neutral rate as 15-15.5%. Unless you demolish that calculation, why do you say that at 18% you will lose revenue? He has provided a cushion of almost 2.5-3%.
What will be the extent of revenue loss to states?
I have not done the numbers and so can’t say. In value added tax (VAT), the revenue loss anticipated by state governments was exaggerated. I was always confident that the revenue loss would be less than what they calculated. Please understand, VAT was an intra-state tax. We are now in the new ball game of a tax that applies intra-state, inter-state and in the course of imports. The problems are larger than the problems faced by VAT. There will be a revenue loss. But I think in the medium term, revenue losses can easily be recouped.
How does one ensure speedy disbursal of funds to states?
No money can be parked anywhere else except the Consolidated Fund of India or in the Consolidated Fund of the states. I think the intention was that some money must go to the Consolidated Fund of India and some money must go to the Consolidated Fund of the state concerned. The intention is correct, but the drafting is poor. I would have drafted it more elegantly.
What is your view on the apprehension that the GST will squeeze municipalities’ of the funds they currently raise?
Of course they have to forego entry tax and Octoroi. Otherwise what is the purpose of having GST? There is the state finance commission and we amended the whole chapter on panchayats and municipalities. The state finance commission is enjoined by the Constitution to provide for devolution of funds to municipalities. They should use the state finance commission machinery to demand their rightful share of revenues that are accruing to the state.
Will GST affect India’s federal character as feared by some parties such as the AIADMK, as it takes away states’ power to collect sales tax?
It would not compromise the federal character. For example, in enshrining a concurrent list in the Constitution, the founding fathers acknowledged that sovereignty will be shared by the Centre and states on certain subjects; that lawmaking powers will be shared by them. What are we doing? We are putting a taxing power effectively in the concurrent list so that the Centre and states will share the taxing power.
Given that India is one market, in fact, the world is becoming one market, we must recognise that what was considered valid 70 years ago (during the framing of the Constitution), may not be valid today. Further, please read Article 301 of the Constitution. Trade and commerce shall be free throughout the territory of India. India has never fully realised the potential of that Article. This was copied from the Australian constitution. Other federal countries have reaped the full potential of such an Article. We have not fully reaped the potential of this Article. GST is a major move to effectuate the goal of Article 301.
AIADMK is an outlier. I think the AIADMK doesn’t understand the economics of the 21st century.