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Debate: Is GST a game spoiler or game changer?

Member of Parliament M. Veerappa Moily and Madhya Pradesh CM Shivraj Singh Chouhan debate on the much-awaited tax reform - Goods and Services Tax.
     Print Edition: June 21, 2015
Debate: Is GST a game spoiler or game changer?
Picture for representation purpose only. Source: Reuters

'NDA'S HALF-BAKED GST IS A BLUNDER'

M. Veerappa Moily
Advocate and Member of Parliament (Lok Sabha)

Anumber of questions on the GST remain unanswered even today. To what extent are the states on board? Have any month-wise targets been fixed? Where is the roadmap? Further, some provisions in the 122nd Constitution Amendment Bill, as introduced by the NDA government, as well as the suggestions by states, will defeat the very purpose of the GST.

The main aim of bringing in the GST was to broaden the base, lower the tax rate and remove the cascading effects of taxes on inputs. But the additional one per cent tax proposed in the Bill as well as the high revenue neutral rate (RNR) of 27 per cent that is being considered will be a disaster. The one per cent tax will lead to cascading effects, the high RNR will encourage tax evasion and reduce compliance, and more exemptions will narrow the base and increase the tax rate.

The Bill has brought out fundamental differences from the 115th Amendment Bill of the UPA. In the proposed GST Council, the Centre will have one-third voting power and the states together will have two-third voting power. For any proposal to be cleared by the council it has to get 75 per cent of the vote. This means anyone who has greater than 25 per cent vote can block any measure. Without the Centre's approval nothing can be cleared in the council. While the UPA amendment sought consensus, the NDA amendment brought in contradictions and confusion. While the UPA measure provided for a grievance redressal mechanism, the NDA has done away with such an objective and transparent measure.

The UPA's Bill allowed the states to tax entry of goods into a local area for use or sale only to extent levied by a panchayat or municipality. This provision has been deleted in the NDA's Bill. The NDA's approach negates the spirit of the third tier of decentralised democracy. Also, the 122nd Amendment does away with the philosophy of cooperative federalism. This may create problems for the state governments of regional parties and silence the minority in a democratic polity.

A close examination of the 122nd Bill shows that the structure envisaged is far from being flawless. The Bill provides only a minimalist framework for the levy. The details of the structure and operation of the tax, including the exemptions, rate structure and thresholds will be determined through negotiations in the GST Council.

In this context, three issues must be noted. First, given the nature of Indian polity, there is no incentive to the states to correct the defects implicit in the proposed GST. The inter-state sales tax is proposed to be withdrawn only when the GST Council decides so and given that every state gets some money from inter-state trade there is no consistency for abolishing it. Similarly, there will be no incentive to rationalise the taxes on petroleum products. Second, it would be too ambitious to presume that all the issues relating to the structure and operation of the tax can be accomplished by April 2016. If indeed, they should be, the Empowered Committee will have to come up with a detailed action plan with month-wise targets and monitor the implementation mechanism. Finally, while the GST is an important reform, it is unlikely to be flawless and therefore, will not be a game changer. We should see this as a process, the next stage of reform and continue to improve it upon over time.

During the next 11 months, the Constitutional Amendment Bill will have to be passed by Parliament. At least 50 per cent of state legislatures must pass this Bill. Then after the President's assent, it becomes part of Constitution. After this, the Centre and states will have to pass the GST legislations. Rules will have to be framed. It is a huge challenge to implement the GST by April 2016. The NDA, with the half-baked GST and dumping the DTC, has committed a historical blunder.

 


'IT IS DESIGNED IN A HUMANE WAY'

 

Shivraj Singh Chouhan
Chief Minister, Madhya Pradesh

The fundamental objective of the GST reform should be to reconcile cooperative 'fiscal' federalism (political) and the globalised call for enabling common national markets (economic). The question is not about whether the NDA bill is better than the UPA's. Reform must evolve towards a common minimum understanding of what is in national and state interests. The GST should not be the BJP's or the Congress's, but should be an agenda with strategic impact on our future as a state and a nation.

Naturally, this Bill is better, having passed greater scrutiny from political, democratic and economic perspectives. The Empowered Group of State Finance Ministers (EGOSM) is working with the Union administration to steadily resolve various contentious issues. The final consensus about the GST should be about what Prime Minister Narendra Modi says, ensuring sabka saath for sabka vikaas.

The core sentiment to be appreciated is the radically different approach of the NDA - led by Modi, who has journeyed his way through the dynamic Centre-state interface.

The states had long withstood undermining of their policy jurisdiction - both in terms of strategy and finances, due to scheme-tied funding of development programmes that the UPA had perpetuated. What the PM, ably assisted by his government, and especially Finance Minister Arun Jaitley, is trying [to do] is to ensure holistic improvement in the reform narrative. On the one hand, the government diligently studied every outcome of the EGOSM deliberations. On the other, he ensured timely enhancement (from 31 to 42 per cent) of fund devolution to states based on the 14th Finance Commission recommendation. The dismantling of the Planning Commission and the establishment of the NITI Aayog was another concrete reform. The chief ministers now have ready platforms to share their best governance practices. The essence of cooperative federalism is being realised in its true spirit through these developments.

Indeed, the GST reform is still a work-in-progress, but so is every political process in a mega-diverse system like India. Modi and his government have displayed unprecedented courage in accepting state inputs, both political and technocratic, in the improvement process.

Madhya Pradesh is at a critical juncture in its development as India's food crop bowl and its internal multimodal logistical hub, apart from being an emerging champion of the 'Make in India' campaign. Tourism in my state, like any other, is bound to improve quantitatively and qualitatively by leaps and bounds once the market anomalies are corrected by the GST reform. Our resistance of the GST in the UPA regime was against the form and not against the reform.

The crux of 'Make in India' (which encompasses every economic activity - not just industrial manufacturing) is value addition, and the GST reform should be one of the most crucial measures taken to ensure this. It should trigger greater investment and employability, while enhancing quality of product (goods and services) and quality of life (disposable incomes) of every citizen and enterprise, without eroding that of the other. A GST model worked out in such a way so as to take care of the small and middle level businesses, such as not inciting inflation, not compromising on the financial autonomy of the constituent units of the Union and not eroding the limited revenue base of certain states like Madhya Pradesh is always welcome.

My experience of leading the transition of Madhya Pradesh from being a BIMARU state to the fastest-growing and one of the most productive states in India, with steadily rising disposable incomes, strengthens my resolve and conviction in supporting Modi's government in seeing the GST reform being designed in a more humane and federalist way than before.

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