The GST reform has virtually come to a standstill. It is earnestly hoped that the Empowered Committee of State Finance Ministers will end the deadlock in its meeting this week. However, prospects are not very optimistic and surely it will take all the persuasive powers of the chairman of the empowered committee to bring the finance ministers back to the drawing table. With the reform divided on party lines, the agenda no longer seems to be what is good for the states and the country. Otherwise, it makes little sense that the parties that championed the cause of tax reforms when they were in power should go back to suggesting the retention of central sales tax in the new reform! Thus, while some states are showing no urgency in pushing GST reform, others have even taken a stand which is clearly retrograde and the “grand bargain” is yet to gain the momentum to bring the reform to the stage of implementation.
It is most unfortunate that the reform process that was progressing so well got stalled. After the Finance Commission’s task force report, the states started reopening one can of worms after another. The recommendation that the states should not be compensated for loss of revenue if they did not implement the “model GST” did not go down well and the very low estimate of the revenue-neutral rates provoked the states into taking retrograde steps like increasing the VAT rate from 12.5 per cent to 13.5 per cent. Given that sales tax is the only major revenue handle to the states and given the wide inter-state variations in the revenue-neutral rates, the states with high effective rates have been suggesting the adoption of floor rates rather than fixed rates. Furthermore, having been used to taxing the non-residents in the past, some states have gone back on the entire logic of reforms and want to retain their purchase taxes on certain items! One state has even forgotten the very objective of the reform — of ensuring a common market in the country — and is demanding the retention of central sales tax on the queer logic that in any case we cannot implement the ideal form and, therefore, we should accept this aberration. Surely, the best is the enemy of good, but that should not lead us to choose the worst!
It must be noted that reviving the GST reform is the only hope for fiscal consolidation for the country in the medium term without retrenching social and physical infrastructure spending. According to the plan recommended by the Finance Commission, the consolidated fiscal deficit of the central and state governments relative to GDP should be reduced from the budgeted 8.5 per cent in 2010-11 to 5.4 per cent in 2014-15. In addition to compressing the fiscal deficit by 3 per cent of GDP, the increased spending on food security, education and health care would require a further 3 percentage points in the medium term, which means the central and state governments will have to generate additional resources, disinvest and re-prioritise expenditures to the tune of 6 per cent of GDP. It would be unrealistic to expect a significant increase in revenue-GDP ratio from income tax after the spectacular buoyancy leading to the increase in the direct tax-GDP ratio from 3.8 per cent in 2003-04 to 6.5 per cent in 2007-08. Therefore, the only hope is the GST reform. The states should realise that participating in this reform is a win-win strategy. Rather than bothering about short-term losses from tax exportation which in any case will be compensated by the Centre, they should focus on the long-term productivity and revenue gains from having a competitive tax system that minimises compliance cost and distortions to the economy.
It was George Santayana who wrote: “Those who cannot remember the past are condemned to repeat it.” It may be recalled that it took the states several years to come together to reform their cascading-type sales taxes with several rates to an intra-state value-added tax with two rates. Although the discussion on the reforms started in 1994 and implementation was planned early in the new millennium, it got finally implemented in April 2005 even as Tamil Nadu and Uttar Pradesh jumped on the reform bandwagon much later. The same thing is being repeated now but unlike in the VAT reform, introduction of GST requires that all the states implement it together. Unfortunately, trade and industry in the country prefer to be mute spectators and adjust to the tax system given to them or, if they undertake advocacy, argue for their sectoral interests rather than overall gains to the business. It is fervently hoped that the states will see the reason and, in the interest of the accelerating employment and income growth, will look at the larger picture and not squabble and haggle over minor matters.
It takes statesmen to push the reform agenda and there are not many in the states. Perhaps, the Union finance minister should don the mantle and the central government should move forward and implement the reform within the prevailing constitutional parameters. This requires the Centre to extend the tax to all services by converting the prevailing selective tax into a general tax, unify the excise duty by converging the rates and converting the specific duties into ad valorem and have a common threshold and rate for both goods and services. A separate sumptuary tax can be levied on cigarettes. The threshold could be kept at Rs 50 lakh manufacturing turnover in the case of goods and sales turnover in the case of services, and the tax may be levied at a uniform rate of 10 per cent. With the computerised information system linked to PAN put in place, and with exchange of information between excise and income tax departments, there could be significant revenue gains. This reform will secure a place for the finance minister in history as the statesman who introduced GST in spite of formidable difficulties. This could also veer the states around to motivate them to introduce the GST reform next year. The question is, will it happen? Let us hope it will.
The author is director, NIPFP. The views expressed are personal
Comments at: mgr@nipfdp.org.in