GST: 1 April is a sure miss, note ban has made Jaitley's compensation math a lot tougher

How will the government find the money required for additional compensation is a question given that there is not much room to expand the scope of demerit goods

Dinesh Unnikrishnan January 04, 2017 12:30:15 IST
GST: 1 April is a sure miss, note ban has made Jaitley's compensation math a lot tougher

The post demonetisation days have made the job of union finance minister Arun Jaitley’s task on goods and services tax (GST) roll-out a lot more difficult. The man, who spearheaded the consensus-making initiative from the very beginning--both with the states and political parties--will now have to face a fire test to rebuild the consensus in order to make the landmark indirect tax reform a reality at the earliest. GST appeared to be on schedule (for the roll out on 1 April) till Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs 1,000 notes on 8 November, effectively scrapping 86.4 percent of the total currency in circulation overnight.

Post this day, Jaitley’s GST task got difficult and 1 April deadline almost looked impossible on account of the following reasons: One, the hard-won political consensus turned weak as majority opposition parties found little merit in the Modi government’s reasoning for invalidating high value notes to check black money, fake currency corruption and terror funding, the originally stated objectives of the demonetisation. Also, the lack of preparedness of government in managing the currency swap resulting in a severe cash crunch irked all political parties. Two, the initial compensation estimate worked out for states lost relevance since most states have reported additional revenue losses on account of demonetisation-induced cash crunch.

GST 1 April is a sure miss note ban has made Jaitleys compensation math a lot tougher

Representational image. Reuters

In Tuesday’s GST council meeting, states highlighted this fact. According to West Bengal finance minister Amit Mitra, losses to states on account of note ban could go up to Rs 80,000-90,000 crore from Rs 55,000 crore estimated earlier. “The GST council took a decision to create a fund of Rs 55,000 crore for compensating states with cess on demerit and luxury. This was the model before the tsunami of demonetisation. Now, everybody’s compensation would go up. We had at that time estimated that at most five states would need compensation as others will manage to achieve 14 percent growth. But now many more states would need compensation,” Mitra said.

How will the government find the money required for additional compensation is a question given that there is not much room to expand the scope of demerit goods. Thus, whether Centre will be able to honor its promise of 100 percent compensation to states, reworking the compensation draft, factoring in the demonetisation loss, needs to be seen.

Besides, there are also issues concerning dual control between the Centre and the states on the tax assessment rights for companies with annual turnover of Rs 1.5 crore and below. In Tuesday’s meeting, few states also reportedly opposed Centre’s proposal to take away the rights of states under GST pertaining to their right to tax sales of fuel explored and sold from territorial waters. States want rights to collect tax upto 122 nautical miles away from the cost.

To be sure, these aren’t unsolvable issues in the way of GST roll-out, but will need several rounds of discussions and consensus making. The deadline of 1 April is anyways ruled out for now. But to avoid a last-minute rush before September, when the time given by the constitutional amendment expires, FM Jaitley will have to work hard.

Missing the 1 April deadline is actually a relief since the economy is still experiencing the pain of cash-crunch, as this writer pointed out in an earlier column. A GST roll out few months later, as said by some of the state finance ministers, since most of the pain that accompanied demonetisation will thin out by then. As of now, the Indian economy is passing through a self-imposed slowdown phase with visible problems in manufacturing, services sector and even on discretionary consumer spending.

The PMI, bank credit and auto sales numbers offer enough evidence. The Reserve Bank of India’s (RBI) fiscal year 2017 growth downward revision (from 7.6 percent to 7.1 percent) , which doesn’t even take into effect the demonetisation impact fully, adds to the worries.

In this backdrop, the immediate disruptions GST roll out by April will have a double whammy effect on the economy, according to economists, and hence July-September period sounds more realistic. A delayed GST means no big surprise to investors given that we already missed one deadline last year and there were widespread concerns about the lack of preparedness of the country to migrate to a new regime at this stage.

The note ban has already impacted most segments of the economy including the small traders and service sector. If the cash crunch prolongs, things will only worsen going ahead. Jaitley's task is double fold--repairing the demonetisation damage in the economy (plans of which should be laid out in the 2017 Budget) and rebuilding the GST consensus among states and political parties.

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