News reports over the week end have it that the much awaited GST may miss the 1st April deadline for its introduction, given the continued uncertainty as to when a key element of the reform process, that of the Constitutional amendments that are required to enable the GST to come about, will be initiated. This article discusses the recent developments in this regard.
As is now well known, the Centre had initially prepared a particular version of the Constitutional amendments and had put it before the Empowered Committee of the State Finance Ministers (EC) for consideration. This happened on July 21, 2010, on which date, the Finance Minister laid out the framework for the introduction of the GST in terms of several design element of the GST, besides reaffirming the intent to introduce the GST by April next year. This particular version of the Constitutional amendments visualized the setting up of a GST Council with the Finance Minister, the MoF and all States Finance Ministers as members. The Council was envisaged as the supreme body, with powers to regulate all aspects of the GST. Significantly, it was envisaged that the Finance Minister will have a ‘veto power’ over any of the proposals emanating from the Council, notwithstanding that every such proposal would be required to be approved by at least a 2/3rds majority of the Council Members.
The EC discussed these draft proposals on the Constitutional amendments in its meeting of August 4, 2010 and expressed serious reservations on certain aspects, in particular the ‘veto power’ assigned to the Finance Minister. The States perceived this as a significant loss of fiscal autonomy on their part. Indeed, it appears that the States perceived this loss of autonomy purely in terms of the envisaged formation of the GST Council itself as, in their view, the Council would obtain primacy over the Legislature. Taking note of these very strong objections, a revised set of Constitutional amendments were thereafter prepared by the Centre and forwarded to the EC for consideration. The EC debated this revised draft in its meeting of August 18, 2010. The Finance Minister met with the EC on this day and spoke at length about the Constitutional amendment in question.
This speech is noteworthy for the light it sheds on the nature of the revised Constitutional amendments that were mooted as also for several other points made therein. Specifically on the Constitutional amendments, the Finance Minister said as follows:-
“The “binding’ nature of GST Council decisions has also drawn comment from the perspective of loss of autonomy. Although the loss of autonomy was clearly bilateral and mutual, the problem we are faced with is a difficult one. On the one hand, we wish to put in place a system where adherence to the commonly accepted structure of rates, exemption etc. would be the norm, yet we do not wish to be fettered in our actions. Recognising this dichotomy, it has been proposed in the revised draft that the decisions of the GST Council would be “recommendations” to the Union and the States. Since these decisions would be taken by “consensus”, it is for us to respect them and develop a healthy convention of abiding by them, as is the case with several other Constitutionally mandated bodies.
You would agree that in order to operate a dual GST of the type proposed by the Empowered Committee, there is a fundamental need for a forum where the Centre and all the States can discuss and jointly decide upon critical parameters. The GST Council is precisely such a forum. The collective wisdom of the council would be a valuable resource in benchmarking rates, exemptions, thresholds and other key parameters for both the Centre and the States. Even if its decisions are not binding, they would be useful as guiding principles which we would choose to ignore or violate only in very grave or exceptional circumstances.”
It can be seen from the speech above that the second version of the Constitutional amendments has diluted the role of the Council to a recommendatory body as opposed to the earlier envisaged deciding body on all matters relating to the GST. It is also evident that the Finance Minister has been forced to significantly compromise in order to persuade the States to come on board. However, it appears that even this watered down version of the amendments has not found favour and a third revised draft of the suggested amendments will now be prepared by the Joint Working Group set up for the purpose.
As regards the April 2011 deadline, the Finance Minister had to say as follows:-
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“I learn that during this morning’s discussions, some State Finance Ministers expressed reservations on the introduction of GST by April 2011 and advised a further postponement. Here, I will like to stress the urgency of bringing to culmination an effort which started four years ago. As I had mentioned in my last meeting with you, we must make all efforts to meet the timelines we have set for ourselves. It must be appreciated that the Constitutional Amendment is only an enabling provision. It does not prohibit us from continuing our dialogue on rates, exemptions and other issues related to GST. Both the activities can go on parallely. The wisdom lies in moving ahead with the Constitutional Amendment without any further delay as a preparatory step for the introduction of GST.”
It appears that these compromises and exhortations of the Finance Minister have, as yet, failed to achieve the objective of obtaining the assent of the States for tabling the suggested amendments in the monsoon session of Parliament, which ends on August, 27, 2010. The Centre had apparently hoped that parallel movements on the Constitutional amendments as well as on other key aspects of the GST, such as IT infrastructure, finalization of the rates, exemptions and thresholds will all take place in order that the GST be introduced by April next.
If, as a result of this lack of consensus, the Centre refrains from tabling the Constitutional amendments in the present session of Parliament, it is pertinent to ask the question as to whether the GST can at all be introduced by April 2011. The logical answer would be that it would not be possible to do so, since there would simply be no time for businesses to prepare and, more importantly, there would continue to be a significant degree of uncertainty as to whether the enabling amendments to the Constitution would be effected in time. Therefore, if news reports are to be believed, the Centre may choose not to table the amendments in a rush and may choose to instead build consensus and thereafter table the amendments in the winter session of Parliament, which would be a few months away. In which event, the Centre could logically pursue the introduction of the GST a few months subsequent to April 2011. The important point to note is that even if the April deadline is not met, the delay in introduction ought not to be more than a few months thereafter. This, by itself, is not a bad idea if, in the bargain, we have a better designed GST and one on which all parties are agreed.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers
E-mail: pwctls.nd@in.pwc.com