GST Bill: Chidambaram rakes up aam aadmi in Rajya Sabha, asks govt to cap rate

New Delhi: The aam aadmi should not be subject to the whims of the Executive on tax rates. GST can also be expanded to mean 'Good Sense Prevails'. The 18 percent standard rate under GST was not plucked from the air. Former Finance Minister P Chidambaram was on a roll in Rajya Sabha Wednesday while speaking over the crucial GST Bill. He coined many phrases in mock horror at the attitude of the Modi government in pushing ahead with a bill which was conceived and first moved by his government years back.

P Chidambaram. PTI

P Chidambaram. PTI

Congress has been acting difficult on the provisions of this bill for many months and had put forth three major demands, two of which seem to have been met by the government. These are: scrapping of the proposed 1 percent additional tax, capping the standard rate at 18 percent and making it part of the Constitution Amendment Bill.

Today, Chidambaram again made a strong pitch on capping the standard rate of GST at 18 percent while also carping on two-three other provisions of the bill. On the face of it, protecting the aam aadmi from the whims of the Executive sounds like a convincing argument from the Opposition benches in Rajya Sabha.

If the standard rate is capped, and put in black and white, in the Constitution Amendment Bill, only the Parliament can then change this rate. This is one of the demands of the Congress which the Modi Government is loathe to meet. Chidambaram today quoted a report by the government's own Chief Economic Advisor, Arvind Subramanian to say that the Congress has not plucked the 18 percent rate out of "thin air" and has in fact taken a cue from the CEA's suggestions. His argument was that tax rates should be changed by the Parliament only, not by the government on any whim.

Chidambaram is right when he says that world over, indirect taxes are seen as regressive since the rich and the poor have to pay these equally. So when one wants to buy a bottle of soft drink, for example, the tax component is the same regardless of whether the buyer is rich or not. But direct taxes such as income tax and corporate taxes, make a distinction between the rich and the poor, taxing each category according to its ability to pay.

Congress' argument has been capping the standard rate under GST at 18 percent and then incorporating a mechanism under which this rate can be changed only by the Parliament. Not by the government, as is the norm each year for levies like excise and customs duties etc. He made a case for this standard tax by also referring to the CEA's report while warning that anything higher will be hugely inflationary.

But on the Opposition's demand that the GST rate be mentioned in a Constitution Amendment Bill - the Subramanian panel never agreed. It said in the report that "credibility of the macroeconomic system as a whole is undermined by constitutionalising a tax rate or a tax exemption. Setting a tax rate or an exemptions policy in stone for all time, regardless of the circumstances that will arise in future, of the macroeconomic conditions, and of national priorities may not be credible or effective in the medium term. This is the reason India and most credible policies around the world -- do not constitutionalise the specifics of tax policy. The GST should be no different." The government has also repeatedly said that casting the standard rate under GST in stone is not feasible and it was not in favour of stating the rate in the Constituion Amendment Bill.

It remains to be seen what the final shape of the GST legislation will be but its efficacy for India is not in doubt. For one, GST in some form or the other, is applicable in most high-income countries.

According to the World Bank, over 160 countries have some form of value added tax (VAT), which is what the GST is. But the ambition of the Indian GST experiment is revealed by a comparison with the other large federal systems—European Union, Canada, Brazil, Indonesia, China and Australia--that have a VAT. The United States does not have a VAT.

The CEA's report says most of these countries mentioned above face serious challenges. "They are either overly centralized, depriving the sub-federal levels of fiscal autonomy (Australia, Germany, and Austria); or where there is a dual structure, they are either administered independently creating too many differences in tax bases and rates that weaken compliance and make inter-state transactions difficult to tax (Brazil, Russia and Argentina); or administered with a modicum of coordination which minimizes these disadvantages (Canada and India today) but does not do away with them."

What India proposes now is a Goods and Services Tax (GST) that will replace a patchwork of central and state levies on goods and services, will tax consumers rather than producers.

The tentative date of implementation of GST is April next year but that may likely be missed, as smart politics may dictate a delay. Short term inflation and price rise cannot be ruled out because of GST implementation, say experts. And with some state elections scheduled for next year, it is possible that political expedience dictates a delay in implementation of GST from next fiscal.

Anyway, once the Parliament approves it, the bill will go to the states for approval. Then, a GST Council comprising state finance ministers will need to agree on specifics including the tax rate. The proposed GST will not apply to alcohol meant for consumption, electricity, real estate and petroleum products.

Updated Date: Aug 03, 2016 17:51 PM

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