As GST rollout nears, pain points increase and the blame rests squarely on both central, state govts

The proverb - It ain’t over till the fat lady sings – seems particularly apt for what appear to be never-ending negotiations in preparation for the goods and services tax (GST) regime. The meeting of the GST Council on 3 June was expected to be the last before the likely rollout on 1 July, but now there’s going to be another one on 11 June.

At the Saturday meeting, there was progress on the transition path for businesses – the credit that they can claim for pre-rollout stocks - and the tax rates for some pending items, notably gold, textiles and bidis. The rates for a few more will be debated at the June 11 meeting which will also put what should hopefully be the finishing touches to accounting and electronic way bills.

There are indications that the Council could, at this meeting, revisit some of the rates that had been decided earlier. And this shows why, with every step that the country takes closer towards GST, the sense of relief is tempered by a sense of foreboding – of the many problems that are sure to surface sooner or later.

Take the issue of rates. The fact that 33 states could come together and arrive at agreement on rates of thousands of goods and services is something that is heartening. Remember each of these goods and services will be taxed at the same rate across the country. Some finance ministers of some states may carp, but there has been consensus on most rates. This is cooperative federalism at its best.

But the inevitable result of this need to take along 33 state governments and multiple other stakeholders is the fact that India is getting a sub-optimal GST regime. Not only are there multiple rates but even goods and services within the same category being taxed differently – hotels, restaurants, footwear and ready-made garments, to name just a few.

Union Finance Minister Arun Jaitley. PTI

Union Finance Minister Arun Jaitley. PTI

Whatever the political realities behind this, the fact remains that far from ushering in a new simplified tax regime, GST is going to retain all the complexities of the old. And old style lobbying will continue – already there are business and consumer groups issuing statements, holding press conferences, threatening strikes. Can bribing politicians be far behind? Delhi’s finance minister Manish Sisodia has already hinted that the consensus on keeping real estate out of GST shows the deep nexus between politicians across states and the builder mafia. It will be interesting to see which rates get revised at the next meeting.

What is also going to inevitably ensue is litigation. In January, the Delhi High Court ruling brought an end to a 14-year fight between a footwear manufacturer and the customs department about the definition of a sandal versus a chappal ; expect many more such classification disputes.

Critics of this government will blame its haste in pushing GST for this state of affairs. Yes, the government is keen on early implementation, but this is something for which all state governments are equally responsible. So this is a collective political failure to rise above populism; it is not a cross the central government must bear alone.

What Saturday’s meeting also showed was the seriousness of the GST Council to move ahead on implementing the anti-profiteering clause. The meeting decided to set up a committee of officials to keep a watch on prices. Besides, according to this Indian Express report, the centre has submitted draft rules which involve setting up a National Anti-Profiteering Authority which can initiate judicial proceedings. The blood runs cold when one thinks of this.

Is this being alarmist? Didn’t other countries have similar mechanisms?

There is no denying that all countries that switched to GST saw a temporary spike in inflation lasting from a year to a couple of years. In the extremely bitter politics that happens in India, no government wants any price rise and our politicians have a penchant for meddling with prices at the drop of a hat, even without understanding how a particular business works.

Malaysia and Australia did set up anti-profiteering mechanisms for a post-GST scenario. But as this article by Pratik Jain of PwC in Mint shows, both had different approaches. In Australia, the task was given to the Australian Competition and Consumer Commission (ACCC) which educated customers and businesses and also monitored prices (starting 12 months prior to the introduction of GST). There was action taken in cases of extortionary pricing, but the number of prosecutions were only 11. In Malaysia, on the other hand, the anti-profiteering provision led to large-scale litigation. No prizes for guessing which of these two scenarios is likely to play out in India – our economic history bears this out.

The Indian bureaucracy is harassment prone even when it is not given explicit powers; it is certain to run amok when it is empowered to monitor corporate behaviour and demand explanations. When it comes to matters relating to pricing, then the bureaucracy will get the full backing of politicians across the spectrum. This will only open new avenues for corruption.

In most countries, GST has led to a simpler, hassle-free tax regime. How it plays out in India remains to be seen; right now there is little scope for optimism on this score. Some of the likely problems may be the result of political compulsions. But that doesn’t take away the pain.

Updated Date: Jun 05, 2017 09:07 AM

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