GST Bill: Congress' obsession with 18% rate is illogical; 20% is the number

The Congress party’s demand to cap the Goods and Services Tax (GST) standard rate at 18 per cent in the Bill isn’t a workable idea. P Chidambaram knows it, so does Anand Sharma and Ghulam Nabi Azad in the Congress-camp. Pure politics is at play here.

State governments, which are staring at a huge revenue loss will fight against an 18 percent rate tooth and nail, thus the whole process will turn a nightmare for the BJP and the Narendra Modi-government, forcing them to crawl back to the Congress camp pleading for mercy. Even if consensus emerges first with the Congress and then with the states on a mutually agreed rate, time will lapse and the final rollout will not happen before 2018, when the resultant immediate price rise will result in an anti-incumbency wave benefitting Congress. For this reason, the euphoria in the BJP camp post the GST amendment is short-lived. This is the Congress’ game plan as Firstpost pointed out in an earlier article.

Is there an 'ideal' GST rate?

The fact is that there isn’t a perfect GST figure. There never can be. With 29 states and 7 Union Territories accommodating 1.3 billion population, India is a small continent with several tiny countries. The states (or provinces as they used to be called in the colonial era), have different geographical conditions and economic models. Each is different from the other making a uniform federal economic structure difficult, if not impossible. Some (Gujarat, Tamil Nadu, Maharashtra) are manufacturing states, while some (like Kerala and Goa) are dependent on services, and states like Punjab and Uttar Pradesh are agricultural economies. The revenue sources and hence tax requirements of these states are different.

P Chidambaram. PTI

P Chidambaram. PTI

The states have so far managed their tax requirements with specific additional state-levies over the central taxes. Also, a multiple rate structure is inevitable to factor in the needs of essentials and so-called demerit goods (to accommodate both the poor and rich).

The GST standard rate is crucial since it will broadly be effective for around 70 percent of goods and services. However, there is no way all can agree on one specific GST standard rate, of say 18 percent of 20 percent. But, the ideal rate, as the government’s chief economic advisor (CEA) Arvind Subramanian pointed out time and again is fixing the standard rate closer to 20 percent. To understand this, let’s look at the present rate structure. Currently, if we are to look at the weighted average of the central and state level taxes, in many cases it will come around 28-30 per cent. About 80 per cent of goods attract 12.5 per cent of central excise duty while at the state level 55 per cent of items are charged with 14.5 per cent VAT or sales tax. Thus, the weighted average of the two in 65 per cent of the items comes to 27 per cent. Now, add state cess, Octroi and entry tax takes, the final figure goes to 30 per cent.

How does the Centre can expect states to suddenly forego their tax intake by a good 8-12 per cent? That’s suicidal for many states and that’s the reason even the BJP-ruled states aren’t showing a happy face when the issue of far too lower  GST standard rate, say 18 per cent, come in discussions.

CEA Subramanian rightly put the mindset of state governments on the issue of rates in an interview to ET Now television channel. “The (GST rate) numbers that they (states) are currently throwing out, I suspect, are also informed by a healthy degree of anxiety and nervousness because remember we are in a very new territory here,” Subramanian said. This is the reason why most states are already pitching for a standard GST rate above 20 per cent, around 23-24 per cent. But, is that a feasible idea?

In the GST regime, prices of most manufactured items will come down since there won’t be roll over of multi-layer taxes and will only be the destination–tax at the consumer level. Currently, the effective service tax rate, including the Krishi Kalyan Cess, Swachh Bharat Cess and education cess, etc., stand at 15 per cent. But, a GST rate above 20 per cent will be an instant dose of high inflation since all services (hotels, travel fares etc) will go up sharply. That impact can severely hit inflation and the resultant course of interest rates in the economy. The hard won results of the Reserve Bank of India’s inflation war will erode and its ability to lower interest rates in the economy to support growth will be curtailed.  Most importantly, it will hit the common man hard, since there is no commensurate income increase to pay higher taxes.

Trade unions, who are watching the unfolding scenario, will take their protests to the streets causing further trouble to the government on the implementation.  A lot of research has gone into the 17-19 per cent standard GST rate recommendation proposed by the CEA Arvind Subramanian Panel, which has considered all these aspects. Hence Subramanian’s earlier comment that about 20 percent (GST rate) will be a feasible proposition should be taken seriously.

Hailing the slab suggested by the CEA as fine, D K Joshi, chief economist at Crisil said: "A GST standard rate on the lines of what was suggested by the chief economic advisor appears to be fine. A rate higher than that can be inflationary".

Congress seizes opportunity

The intellectuals in the Congress camp understand too well that 18 per cent GST rate will not be acceptable to states. That is precisely the reason why throughout the debate on Wednesday, every Congress leader who spoke, be it P Chidambaram, Anand Sharma and Ghulam Nabi Azad stressed on the point that the GST rate shouldn’t exceed 18 percent, using Arvind Subramanian’s recommendation as the trump card. But, the fact is that Subramanian never pinpointed on an 18 percent figure. Instead, he offered a range of 17-19 per cent. But, the Congress sensed an opportunity here.  The Centre's task looks too difficult given that most states have demanded a standard GST rate way above the 18 per cent, fearing revenue losses despite getting an assurance from Union finance minister, Arun Jaitley that they will be compensated in full for five years.

Possibly, the government  is thinking on the lines of a figure of about 20 percent standard GST rate. The question is what will be the Congress’ strategy if the BJP fails to meet the condition of 18 percent? Will it blackball the Bill then again? If the GST Bill is presented as a Finance Bill, as most opposition parties have demanded including the Left, the BJP will require an all-party consensus to pass the supporting legislations of GST (central and integrated GST).  If the Congress insists on the figure of 18 per cent, then the GST final rollout will be a Himalayan challenge and painfully time-consuming, too.  For an important legislation such as GST, an all-party consensus is the best way to go about since there is a long follow-up process (at least 16 states need to pass the legislation in their assemblies and GST council, which will have state representation, and have to act in unanimity to take the process ahead.)

The bottom line is this: A standard GST rate of about 20 per cent makes sense for all involved to begin with. A rate below that like the 18 per cent demanded by Congress will break the back of state exchequers. The Congress shouldn’t blindfold itself on a single number. It should settle for closer to 20 per cent standard GST rate.


Updated Date: Aug 05, 2016 15:52 PM

Also See