Pratim Ranjan Bose
In 1991, when P V Narasimha Rao
opened the Indian economy, I was doing my post-graduation. And, I
still remember the apprehensions and topsy-turvy in the economy in the
following days. But today we regard Rao for doing so. Thanks to that one step
our economy started growing like never before and most important of all, our
politics changed forever.
A quarter of a century later, I
am now privileged to witness as big a reform that I believe is going to have a
far-reaching impact on Indian politics in the days to come.
In another 24 hours or so, from
July 1, India is set to dump its age-old tax system - that divided the country
into many countries and created sufficient scope for tax evasion - for Goods
and Services Tax or GST. The new tax regime will eliminate tax at
production-end like the central excise and; remove scope of tax arbitrage between
over two-and-a-half dozen Indian States – thereby creating one tax for products
to be sold in the entire country.
What is GST?
In reality, things are a little
more complex than the way I explained. Think of a product produced in
Maharashtra. As on date, the company concerned pays central excise on the
product at the factory gate. Hereafter, the product will be taxed by the State
or States. And, they are of varying nature and rates. Currently, both the
manufacturer and seller can get input tax credit separately from the Centre and
the State. Goods are normally transferred by producers from manufacturing point
to sales point in another state on stock transfer basis that doesn’t attract
duty.
The entire system has many
loopholes. First, since State and Centre collect taxes through different tax
administration at arm’s length from each other, there is cascading or
compounding effect of the tax on the final consumer. Meaning, a product is
taxed, on taxed value. Second, due to variation in tax rates on the same product
in different states – final price of the product also varies from State to
State. Third, variance in tax rates creates scope for tax arbitrage -
especially if the rates vary significantly between neighbouring States.
Inter-state smuggling of goods is a fact of life as manufacturers and traders
often take advantage of this route to evade taxes. The consumer doesn’t
complain if he gets a cut. The beneficiary State looks away. And the affected
State tries to impose more restriction on entry of goods, making lawful transactions costlier. It is a vicious cycle.
GST is going to change this. It
has set five different tax slabs for different products with ceiling rate at
28%. The tax will be collected at the consumption end. Each product will
attract the same rate of taxes across the country. The tax will include State
GST (SGST) and Central GST (CGST) components. Loosely speaking, the concept of
stock transfer is done away with and every movement is regarded as a
transaction (which means taxable). And consumers at each level will get input tax
credit from the GST authority - naturally, the cascading effect of tax (or tax
on tax) will be removed. To get input tax credit, every consumer (excepting the
final one) has to maintain records. It means, his vendors will be GST
registered and the movement of goods along the value chain will be traceable
and transparent.
The GST regime is offering an
incentive for tax compliance. A trader or producer or seller will ask his/her
vendors to be GST-registered, else he will miss the input
tax credit and price of his products will be higher compared to others. Since
the new tax administration will essentially create an ecosystem for tax
compliance, eventually there will be less need for tax policing.
Redefining Centre-State and State-State relations
The crucial point that often
goes unnoticed here is: The new tax system is merging the difference between
Central and State tax administration now operating in silos. Unlike in the past the Union and
State finance ministers do not have the liberty of tweaking tax rates at free
will, as was granted by the Constitution India adopted in 1952.
The entire issue of deciding
tax rates, offering input credit to intermediate consumers and dividing the tax
revenue collected from the final consumer between the Centre and States are the
job of the GST Council – which is a collective of States and the Centre. In one
way it is a sacrifice of State's freedom to determine its set of taxes. In
another way, since States are larger in number and they will collect the taxes
in the GST regime, they will enjoy a bigger say in the GST council. Indeed,
until recently when the Union finance minister Arun Jaitley became the chairman
of the council due to differences between the States on the leadership issue,
State finance ministers chaired the GST council.
As I look at it, GST is,
therefore, NOT a mere tax reform; it is a major reform of India’s federal
system. The very operation of GST council will remove a vast range of
debates on Centre-State relations over the distribution of resources. Such
debates rocked Indian political space in the 1980’s. Though successive Finance
Commissions tried to address the issue - the debate was still
relevant. It would now cease to exist.
More importantly, in the days
to come, we might see a major change in the State-State relationship. Right now
India’s manufacturing sector is concentrated in just five States. A recent
BloombergQuint report point out that just four
States contribute 50% of the total central tax collection, which is distributed
among consuming States. In a way, a Tamil Nadu or a Maharashtra funds
development projects across the country. And chances are the laggards like West
Bengal or UP may not be making judicious use of such resources. Maybe they are
overspending on staff or blowing away money in corruption.
My question is: How will they
behave in the GST council in the days to come. UP or West Bengal is weak
because their politics failed to create economic opportunities. In fact, they
survived on what I call the Bihar model of exporting poverty to the rest of the
nation. Traditionally, these states looked at raising taxes and getting a
higher central share as a shortcut to buy votes. Naturally, they will push for
the same in GST Council too.
But higher taxes will also
higher price and lower demand growth of products which is against the interest
of producing States. The shift of tax collection centre has already affected
the money flow of these producing States. How will they behave in the future?
Will the political leadership of Bihar or UP rise to the occasion and take
steps to become investment friendly and reduce the imbalance? After all, GST
removes the scope of tax war between States.
I am sure, GST council will
reshape our history in many ways than one. We are just not changing the tax
system. We are changing the very way the country was run so far where Centre
was akin to a holding company that had limited control over subsidiaries
operating on a different set of ideals, which often contradicts interest of
other states and national interests.
Endnote
Roll over to the GST regime
will not be without hitches. There are many hitches, ifs and buts, and areas of
confusions.
Some claim the roll out should
have been delayed. But, they should also understand that if we cannot be fully
prepared after 17 year long years of discussion since 2000; there is something
very wrong with our existing political system. And, this has always been the
case with us we spent more time in contradicting each other than finding
solutions. The reason lies in that holding company structure I mentioned.
A stronger India is under
construction in India and it is a process. It will take time. The history says
despite the clumsy approach to things, we had always been in the right
direction.
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