GST launched: There are concerns but this is Narendra Modi's moment in India's economic history

Finally, there was no gong, but the button has been pressed, the speeches have been spoken, the paeans have been sung. The 'tryst with destiny' comparison is quite over the top, but it certainly is a historic moment in India’s economic history. The goods and services tax (GST) is about unifying India into a common market.

This is the final frontier of indirect tax reform, which caps several incremental ones done over the years. Yes, it is flawed. Yes, it is ridden with implementation challenges. But this is it. After this, there can only be some minor tweaking to address these two issues.

One can outrage over the GST becoming all about one person, one can snigger and sneer about the over-the-top 'tamasha', but there is no getting away from the fact that this is Narendra Modi’s moment. His government ushered in GST and he’s going to let the world know about it and not let anyone forget it.

Progress towards GST had stalled when his government took over (in large part because of his own intransigence when he was chief minister). He could have let it flounder but he realised the boost his reformist image would get if it went through. And then, his government went all out to do that. That credit he certainly deserves. We will never have a conclusive answer to the counterfactual – would GST not have happened or would it have taken longer if someone else had been the prime minister?

At the same time, let us not forget that GST could not have come to this take-off point without the ten-year-long efforts of the completely non-partisan empowered committee of state finance ministers. This committee has shown what rising above party politics is all about – the chairmen have been from CPM, BJP, National Conference, Congress and Trinamool Congress. Finance ministers of Congress governments went against the party line of seeking a cap of 18 percent on the GST rate written into the constitutional amendment and perhaps forced the party to stop being inflexible about that.

File image of Prime Minister Narendra Modi. PTI

File image of Prime Minister Narendra Modi. PTI

So forget the boycott of the ceremony; along with Team Modi, all other finance ministers needed to take a bow.

It is good that Modi appears to have realised that there are limits to making this all about himself. The union cabinet did pass a resolution thanking all state governments. Thank you letters went off to all chief ministers, who were invited for the special Parliament session. And in his speech, he thanked everyone who has been involved in the long consultative process, though there appeared to be a dig at the Congress that it was not the effort of one party or government. It was silly of them – and all opposition parties – to boycott the session. They should have shared the spotlight. GST is as much theirs as Modi's. It was good that Asim Dasgupta, a former chairman of the empowered committee of finance ministers, attended it, even though his party – the CPM — boycotted it.

The boycott idea apparently came from the Congress, furious at Modi taking credit for something they initiated. But this pique is misplaced. If the Congress can take credit for VAT and for the Fiscal Responsibility and Budget Management Act, when over 90 percent of the groundwork had been done by Yashwant Sinha in the first National Democratic Alliance (NDA-1) government (99.9 percent in the case of the FRBM Act), the current government can certainly take credit for the GST rollout.

So, there’s no getting away from the fact that this government will always be remembered for ushering in the biggest ever tax reform since 1947. Just as the PV Narasimha Rao government is remembered for ushering in economic reforms, Atal Bihari Vajpayee government for kicking off privatisation and the Manmohan Singh government for the rights-based entitlement legislations. But it is now time to put both the showmanship and the petty carping aside. Modi trying to make GST all about himself does not take away from the fact that GST is going to change India in many ways, beyond taxes and the seamless movement of goods across the country.

'One nation, one tax' rewrites federalism in India. It means the end of tax wars between states, as they have all agreed to the one-rate-across-the-country principle. In the negotiations for VAT through the 2000s, this was a huge sticking point, getting states to agree to even a band of rates was difficult. Post-implementation, there were a few complaints of some states offering rates lower than the threshold. Even in the course of the GST negotiations, there was a feeling that states would not agree to a single rate and that the band of rates for each item would continue. The fact that they have now agreed to a single rate shows that along with a new tax regime, India is also entering into a new era of cooperation among states.

Noted lawyer Arvind Datar has often cautioned that with each state having its own GST law, it could set its own rates, rendering the 'one nation, one tax' regime meaningless. Sure, they can. And a government can’t be dismissed for breaching a gentleman’s agreement on tax rates, after all. But states have spent ten years debating this and have agreed to go by the GST Council’s decisions. In the course of a Mint panel discussion, the finance ministers of Kerala and Assam pointed out that at one of the GST Council’s meetings, Manipur brought up the issue of GST on dried fish and the Council spent half an hour discussing it. Why would state governments spend half an hour discussing tax on dried fish if they were planning to go rogue?

But the real significance of 'one nation, one tax' is the fact that states have willingly surrendered their fiscal autonomy and given the power to set tax rates to the GST Council. What a leap of faith this is gets underlined by one fact – revenues from VAT/sales tax account for close to 65 percent of states own tax revenue and that, for its part, accounts for 80 percent of states own revenues. They have very little fiscal elbow room now. But nobody arm-twisted them to agree. They clearly recognised the larger benefits of this.

GST and the handing over of rate-setting to the GST Council also puts an end to the way budgets were traditionally framed and presented. Indirect tax rates were the reason for the over-the-top secrecy surrounding; now, it is all out there in the open. Direct tax rates have been set for some time now, now that’s happening with indirect tax rates too. Jammu and Kashmir finance minister Haseeb Drabu is right in saying that future budgets will be nothing more than expenditure documents.

And yet, there is no denying that a lot of compromises have been made. The multiple rates have been made one, prompted by the economic desire to protect revenues and the political compulsion of keeping inflation down. State governments have forced petroleum products to be kept out of GST; this is going to affect the economics of pricing. A large number of items – close to half the GDP — have been excluded. There may have been political compulsions, but that doesn’t change the fact that this is not an ideal GST. The requirement that businesses with branches in different states register each as a separate entity – again under pressure from states - is a problematic provision.

The anti-profiteering clause — to ensure that businesses pass on benefits of tax cuts or cost reductions due to GST to consumers by lowering prices — hangs like a Damocles sword over industry. The government has said it is only a deterrent and it will try not and act. But the fear of possible intervention could see companies absorbing genuine cost increases. So bottom lines can take a hit.

Many benefits have been attributed to GST – end of tax evasion and black money, broadening of the tax base, improved compliance, ease of doing business, greater formalisation of the economy and, as a result of all these, a boost to growth. These could have happened if India had a perfect GST with almost no exceptions and just one or two rates and small and medium businesses were better-prepared. As it turns out, even the government does not seem fully prepared.

So whether the benefits come – and when – is something that one will have to wait and see. Hopefully, the government will get down to addressing the design flaws and the formidable implementation challenges. Small and medium industry, still reeling from demonetisation, will particularly need a lot of hand holding. Otherwise the GST dream launch could soon end up as a nightmare.

As Modi walked out of Parliament House, revelling in his moment of glory, did he recognise that if GST brings more pain than gain because of the flaws not being addressed, he will also have to bear the brunt of the criticism?


Published Date: Jul 01, 2017 09:15 am | Updated Date: Jul 01, 2017 11:53 am