GST Breakthrough: What’s in it for Indian Economy?

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General Studies 3

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• Inclusive growth and issues arising from it.

General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

A breakthrough achieved

In a significant breakthrough in GST, the center and states reached a consensus on the contentious dual control issue. It prepared the ground for the biggest tax rollout from July 1^st.

In a deal-maker consensus, the center would assess 50% of the assesses over 1.5 crore rupees annual turnover and the states the other 50% .

As much as 90% of the assesses with less than 1.5 crore rupees turnover will come under the states and the balance 10% under centre. The consensus at the GST council gives the industry much needed clarity and additional time for reform.

Difference- From then till now

• Originally when GST was envisaged in 2004, it was a simplified version of present GST. It was envisaged to have either one or two slabs or rates, and not four slabs and separate cess on them as it is proposed now.
• It was also thought that the rates would be fairly modest, not going upto 28% and then addition of cesses etc. In contrast to it, instead of one rate, there are 6 rates and in place of moderate rate, the rate goes upto 28% + extras on certain demerit goods. (Earlier GST council agreed on a slab structure with rates at 0%, 5%, 12%, 18% and 28% for implementing GST.)
• The role of the center as envisaged in the earlier version of law as well as the law put before the parliament, was much more. It gave them higher role than the states. The current draft of GST has increased role for states considerably.
• Earlier it was assumed that 13-14 taxes by center and states would come into together. At present, GST will subsume a host of indirect taxes levied by the Centre and states, including excise duty, VAT, service tax, entry, luxury and entertainment levies.
• Some changes are well paced, while some changes will have to be fine-tuned with time to achieve the optimum results of historic system of indirect taxes in India. However, the tax slabs are not expected to change from year to year initially and gain stability for 2-3 years so that the continuity is not lost.

The 12 nautical miles jurisdiction

The coastal territory was all along recognized as the territory of union not states. However, the states, by convention and no written delegation or anything else, had been collecting tax on high sea sales. It includes not only fishing but a lot of wholesale trade, bulk trade in commodities in particular- oil, gas, coal, iron ore etc. that takes place in high seas. The tax was collected on high sea sales because then the responsibility of getting it passed- customs, duties etc. is of the buyer.

In the recent GST meeting, it was decided that states will be empowered to tax any economic activity in territorial water up to 12 nautical miles. It is a major decision. It will become even bigger issue when petroleum products will come under GST (currently excluded). Right now the impact of the coastal state tax decision is probably being played down but in future it can be a point of bone of contention between center and states because center hasn’t realized what they have given up. When in future when petroleum products come under the purview of states, it will be an issue. (Constitution amendment provides that petroleum products would come under GST and that will be a decision by GST council and it doesn’t require to go back to parliament for ratification)

Interstate trade jurisdiction

For issue of jurisdiction of interstate trade- IGST- the provision is that in case of dispute between origin of supply (state X or state Y), the software would have certain background fed on the basis of which it would chose.

But if somebody wishes to dispute that computer says it is from state X but it is from state Y, it is very clearly provided for that the powers of mediation and deciding the state of origin would lie with federal government.

However, in any case the IGST income will go to central government and not state government and hence not much problem is expected herewith.

Cooperative federalism

The manner in which the center managed to get some back room consultation with large number of states for consensus is being commended silently. It was outcome of clever pre-meeting consultation among other states.

Earlier, three states were opponent on what was happening in GST council – Delhi, WB and Kerala. But in the last conducted meeting, except for WB, none of the other state representatives had making any opposition.

The most important point is the manner in which the center decide to concede 90% of assesses with less than 1.5 crores to states, speaks well of centre and brings forward its practical and pragmatic decision making power to not get into smaller assesses.

The state directorates, the excise directorates, tax directorates are better qualified to get into the small assesses. The bigger assesses will be 50% sharing that shall be done through a computer software.

Also, the breakthrough was possible because lot of preparatory work had been done before every meeting. The current GST proposal accepted is the one which was proposed by the representative of TN. It was openly known that TN was not entirely on board till recently. Thus, the central government has shown the generosity and the liberalism which was required to get the breakthrough in a major tax reform. Had it stuck to its own decisions and not considered the impact of demonetization, the states would not have come on board and participated diligently.

Relief over date

One of the most debated topic of GST rollout date was finally solved with removal of uncertainty over the date. The clarity on the dates has been welcomed by industrial units and service units. It will give them time to solve issues which are still pending and also get their systems in order.

Areas of concerns

• Passing the law: The three different laws will have to be framed and all states will have to pass it. After the constitution amendment bill was passed, the government monitored states, particularly the BJP ruled states and made sure that atleast 50% of states passed them so that constitution amendment task is complete. The states will have to be kept on board and the centre will have to play active role to make sure that states also pass their laws so that GST can be launched.
• The task of deciding the tax rate on individual items is the biggest task. The tax bureaucracy and politicians should not take charge to create a complicated law. Instead, create a simple transparent tax structure. With six tax slabs, the lobbying will be huge.
• The legislature elections result on March 11 may be a worrying cause for GST agenda as it may affect its time schedule for rollout. It will be important for finance ministry and government to stay firm with the deadline.
• The GST council should avoid:

1. To put more items under higher category of rates. It will reduce tax collections.
2. Minimize and eliminate all exempted items as there is demand to increase such items.

Conclusion

Even to achieve the deferred date, finalisation and publication of GST laws without further delay would be important for India Inc to effectively prepare for migration to the new regime. Next critical aspects to be watched out is GST Council’s discussion on supporting GST legislations, publication of rules and GST rates.

Connecting the dots:

• Enumerate the salient features of proposed new GST law. Discuss the challenges to be faced due to GST implementation.