Business Today

The Die Is Cast

After multiple twists and turns, India finally has a Goods and Services Tax. Here's the lowdown on how it fell into place
Joe C Mathew   Delhi     Print Edition: July 30, 2017
The Die Is Cast
President Pranab Mukherjee and PM Narendra Modi ringing in the GST in Parliament

M Veerappa Moily, chairman of the 31-member standing committee of Parliament on finance faced an unusual problem when he reached Delhi on 30 June to attend his committee's meeting. All conference halls he used to convene such meetings were occupied. It was strange since the meeting was fixed not by him, but, by the Lok Sabha Secretariat itself. He was not the only one to face such a problem. At least two dozen parliamentary committees had received instructions to hold meetings the same day, which resulted in the space crunch. The reason was that the government wanted the committee meetings to coincide with a midnight function to enable members to witness the launch of India's Goods and Services Tax (GST) regime by Prime Minister Narendra Modi in the Central Hall of Parliament.

"Twenty six committees met", says Moily, adding that the meeting of the panel he heads was held in his own chamber in the absence of vacant rooms. It was not just MPs who were part of the celebrations. The midnight ceremony, which took place in the presence of President Pranab Mukherjee, also saw Cabinet members, Parliamentarians, politicians of most hues, officials and industrialists.

MODI'S GST

Like the now ubiquitous 12-digit unique identity number Aadhaar, the blueprint of the 'One nation, One tax' system was handed on a platter to the Modi government by its predecessor - the UPA government in 2014. There was a GST Bill that was already introduced (though lapsed as it could not be passed) during the tenure of the previous UPA government. Barring a clear provision for compensating the states for any revenue loss caused by the adoption of GST, the Bill had addressed most concerns of stakeholders. An entire IT back bone - GST Network (GSTN) - was in the making to provide a common and shared IT infrastructure for the Centre and States, and function as a uniform interface for the tax payer.

But unlike Aadhaar, which was in a ready-to-use format, the implementation of GST had several critical roadblocks. First, the central government did not have the authority to implement it on its own. It had to take all states on board and get a Constitutional Amendment to re-draw the powers of both the Centre and the states to levy taxes passed in the Rajya Sabha and the Lok Sabha with a two-third majority.

That was not easy. The UPA government had tried hard, but failed. P Chidambaram, UPA's finance minister, was not able to hide his disillusionment while presenting the interim budget 2014/15 just before the elections that saw UPA lose and BJP assume power. "I am disappointed that we have not yet been able to introduce GST. I leave it to you to answer the question, who blocked the GST when an agreement on the game-changing tax reform was around the corner?" he asked, with a clear blame on the opposition BJP, and states ruled by that party (Gujarat, Madhya Pradesh, etc) for playing spoilsport.

It was BJP's turn now. On 10 July, 2014, presenting the Modi government's first Budget, finance minister Arun Jaitley didn't shy away from that responsibility. "The debate whether to introduce a GST must now come to an end.. I assure all States that government will be more than fair in dealing with them", he said.


Modi and his ministerial team had sworn in hardly 45 days ago when this statement was made. GST was one of the early priorities of the government. "Before the budget presentation, the FM held a meeting with the empowered committee of finance ministers of states where all GST-related issues were discussed. There were reservations on certain issues, certain points of view. The FM heard them, he also made some general observations saying that we need to engage further, and ensure that GST is implemented", recalls Shaktikanta Das, who was revenue secretary at that time.

As Jaitley himself said later, 'some States have been apprehensive about surrendering their taxation jurisdiction others wanted to be adequately compensated'. He hoped to find a solution in the course of the year and approve the legislative scheme which enables the introduction of GST. Several official level and inter-ministerial level interactions followed. But the real breakthrough came five months later, in December 2014.

THE BREAKTHROUGH

On December 11, there was a meeting of the empowered committee of state finance ministers. The Union Finance Minister, who chairs the current avatar of empowered committee - the GST Council - had no direct role there. The empowered committee was purely State finance ministers' turf and central government's representation was through its officers. The meeting, chaired by Abdul Rahim Rather, finance minister of Jammu & Kashmir, almost declared that consensus eludes the Centre and the States. Several of the ministers were making forceful statements against the Centre. They wanted GST, but they felt the Centre was not yielding on certain issues. Strong statements were made on compensation mechanism, voting structure, inclusion of petroleum products in the GST list, etc. Everybody thought that GST was not moving forward.

That was when Jaitley intervened. In the evening, the empowered committee members had a separate meeting with him, where he once again stressed the need to find a meeting point. The meeting, which happened in Jaitley's North Block chamber, went on till late into the night. It was decided that a select group of finance ministers will sit with Jaitley in the coming days, and thrash out a solution. Within a couple of days, there was another lengthy meeting with six or seven state finance ministers and Jaitley, in the presence of tax and revenue department officials from the centre and the state happened.

Photo: Yashbant Negi

At the end of the marathon meeting it was decided the Bill will exempt only alcohol for human consumption, everything else will remain technically taxable. Thus while petroleum will not be taxed at the moment as the states had wanted, it will be included among the list of taxable items in the Constitution Amendment Bill, as the Centre wanted. The GST Council could announce taxes of all exempted items other than alcohol for human use without any legislative hurdle. It was also decided that an assurance of adequate compensation will be written in the Constitutional Bill itself, thereby allaying the states' fears. The real ice breaker was the Centre's assurance that the compensation can be for five years. Jaitley also agreed, at the risk of diluting the destination-based-taxation principle of GST, to permit a one per cent origin-based tax to compensate manufacturing states for a limited period of time. He was well aware that it was not a textbook GST that he was going to present before Parliament, but had managed to get all the states to come on board to go ahead with the imperfect Constitutional Amendment Bill. On 19th December, 2014, the Bill was introduced in the Parliament.

LEGISLATIVE BATTLE

The next hurdle was to get the bill passed with a two-thirds majority in both houses of Parliament. The Congress led UPA, now in Opposition, wanted the Bill to be sent to the Parliamentary committee on finance, as is the convention. The UPA version of the GST Bill had gone through the scrutiny of Parliamentary panel headed by BJP leader Yashwant Sinha. Now, they wanted it to go through the one headed by Veerappa Moily too, as they felt that it had undergone several changes from what they had presented. The government was not in favour of that as it would have meant that legislation was not happening during Parliament's ensuing Winter Session that year. The government wanted the law to be in place for a possible GST rollout by 1 April, 2016. "They did not involve the Lok Sabha. It was never referred to Parliamentary standing committee on finance. They were in a hurry", says Moily. The government, however, agreed to send the Bill to a select committee of parliamentarians with a mandate to submit its report within a tight deadline. The Committee response was a blessing in disguise. It staunchly opposed what Jaitley felt was the most imperfect piece of the whole GST Bill - the temporary origin-based tax. And that clause got removed.

By then the government had assured 14 per cent growth on revenues for all states for the first five years of GST implementation. The shortfall, if any, would be compensated. The manufacturing states thus had no reason to worry about revenue loss. Jaitley's ability to reach out individual leaders of opposition parties also fastened the process. Once the Constitutional Amendment Bill was passed in both houses of Parliament, and over 50 per cent of the states ratified it, the next task was to get the rules approved by the GST Council (formed to replace the empowered committee after the Constitutional Amendment Bill was passed) and pave way towards what Jaitley considers as "pooled sovereignty".

All goods and services, except alcohol for human consumption and some of the currently exempted items had to be brought under minimum number of tax rates. While the global norm was to have a single GST tax rate, it was unthinkable in India given its diversity. "Only someone who is completely oblivious of Indian reality can do it. The fact is that there are commodities consumed by the rich and commodities consumed by the poor. Deciding on one rate would mean the price of commodities consumed by the rich coming down, and the commodities consumed by the poor going up. I vehemently argued for a multi-rate structure and was successful in influencing the house", Thomas Issac, finance minister of Kerala says. And that explains Jaitley's dilemma. He overcame that by agreeing to have four GST rates.

What Jaitley could seal through his midnight sittings with state finance ministers in his chamber is what the government celebrated on the midnight of 30th June. The transition has only begun, so is the task.

@joecmathew

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