For many the goods and services tax (GST) is both an important economic reform and a measure that is complicated and difficult to understand. In fact, I can’t swear I’ve got my head fully around it. But I think I have a layman’s grasp of the debate over the three Congress preconditions and the government’s response. So, if it’s any help, let me explain.
First, the demand to scrap the 1% inter-state entry tax. This applies to three producing states — Gujarat, Maharashtra and Tamil Nadu. Because GST will lower the tax on manufactured goods (whilst raising that on services) they fear they could lose revenue. That’s why they want the tax.
However, after the finance minister guaranteed 100% compensation for five full years this demand has lost validity. I haven’t found a single economist who supports it. The consensus is the BJP should accept this condition.
However, the other two Congress conditions are more complex. Furthermore, the government has a credible case for maintaining its position.
The Congress wants the GST rate capped and, second, written into the Constitution. Most economists would agree with the first though what the cap should be varies from person to person. Some, like Rajiv Kumar and Surjit Bhalla, put it somewhere between 14 and 16%. Others say 18. But everyone agrees a cap is needed.
The question is: Should the cap be written into the Constitution? Most economists say no. To hardwire tax rates into the Constitution would make a mockery of the document. Also, it would make change extremely difficult because it would require a further constitutional amendment.
The solution could be to write a cap into the GST Bill, much the same way as excise, duties and taxes are incorporated in the budget. This would leave governments — both central and in the states — free to set the rate each year, depending upon prevailing circumstances.
The difference between the Congress and government over the dispute redressal mechanism is equally complicated. As things stand, if there’s a dispute between states or between some states and the Centre the GST Council of States will resolve the matter. The Congress says this means disputants will be judges in their own case. Instead, it wants an independent, possibly judicial, mechanism.
Arun Jaitley’s response is two-fold. First, the issues that need resolution will be political and not economic and, therefore, require politicians to tackle them. Second, setting tax rates is the prerogative of legislatures, which they jealously guard. If this were to be handed to a judicial authority it would mean judges, rather than legislatures, will set the GST rate. That would be a serious breach of legislative sovereignty.
However, one solution could be a combination of the two positions. Let the Council of States be the dispute resolution authority but when it’s unable to do so it should have the power to appoint a third party — not judges but experts — to settle the matter.
There are, of course, other issues that also need resolution. Should electricity, tobacco and alcohol be included in GST? If yes, should they get a brief reprieve from taxation as, I believe, is the case with petroleum? Or does the exclusion of alcohol and tobacco not really matter because they’re finished rather than intermediate products? Though raised by the Congress these are not preconditions.
Finally, consider the above as a rudimentary guide and it might help understand the debate as it unfolds and, possibly, becomes more complicated and involved.
The views expressed are personal