The passage of the GST is necessary for the economy for two reasons. The first is that it is an efficiency enhancer and helps to foster business. It makes doing business easier as firms have to go to one window to pay their taxes and avoid the plethora of processes which exists today. This takes a lot of time and involves a cost as companies have to maintain a contingent of staff to monitor and pay these taxes on time. Therefore, having a singular rate makes the system simple and transparent.
The second reason for having a GST is that it heralds a new generation of reform which is due on the indirect taxes front. At one stroke it creates a system which eschews corruption and standardizes the processes. This has been done globally too as part of the reforms package in any system which hence becomes a benchmark.
It inspires confidence in foreign investors, and given that we are in a globalized world, this is essential as the future growth of the country will have a lot of foreign interest embodied.
In fact there is, and can be, no fundamental objection to the concept of having a unified tax structure and hence should be accepted to all. Today, however, there are two reasons why there is continuous debate and objection to the passing of the bill.
The first is that states are concerned about the overall revenue loss that could result from such a tax. A producing state would tend to be more severely affected by such a tax compared with a consumption state as it may have to compromise on the revenue it would have earned in the existing structure. The second is pure politics where the opposition would like to oppose any idea put forward by the government even if it has no serious difference considering that this idea germinated when the UPA was in power. Quite predictably, the NDA had opposed it at that time.
Now the second reason cannot have a solution as it is not based on ideology but realpolitik. The only way out is to work out a solution by placating the opposition which may ask for some unrelated concessions elsewhere. If the numbers are not there in the Parliament, this appears to be the only solution. On the first, which is a genuine concern, the government has already shared the compensation formula, which probably should be debated in the House more than the ‘idea of GST’. This would be a logical and mature way to go about things.
A secondary concern, which however, has not been raised seriously by any party or state and hence has become a non-issue, is the GST rate or series of rates that are being considered. From the point of view of the household, which finally pays almost all taxes either directly or indirectly, this could be a concern, as it will be hard to really have tax rate/rates which is revenue neutral and inflation free.
Unfortunately no one from the opposition has made this an issue. Our own economic history shows that when tax rates are lowered, prices do not come down commensurately, while an increase in tax gets reflected almost immediately in the price. This rather narrow thinking is good for the nation as it does appear that it is only the politics that has to be worked out which though tough lends focus to the issue.
The monsoon session will be a critical one for the GST and if passed, should see the implementation from April 1, 2017. It will be a new era of taxation for the system and there will be adjustment required from all quarters. The government will first have to create the systems to ensure that the process is seamless and technology will play a major role in ensuring that things are smooth. A question to be addressed is the connectivity of all collection centres to the centralised unit which will enable such flow of information
Second, states on their own will have to figure out how to balance their budgets as while the system of compensation will be there, there would be lags in the receipt of the same which will make cash management that much more important for them. The fiscal deficit numbers have to be reformulated and hence this will be a logistical issue that states have to be prepared with.
Third, at the consumer end the impact of prices would be known only after it is implemented and this will also put pressure on the manufacturing sector to readjust their accounts and pricing systems. As this involves a plethora of such firms coordinating this action across all parts of the country is another challenge. Hence, while companies will be excited to begin with, they too need to have their systems in place.
Fourth, at the government’s end, addressing the issue of redundancy of staff has to also be addressed at various levels, with states having to adjust more than the centre once technology drives this enterprise forward.
Therefore, while there will be euphoria once the bill is passed, as it has been an irreconcilable issue for the last 4 years or so, the next 6 months have to be spent in connecting all the dots which are dispersed across the frame. This will be the main challenge going forward and if there will be delay in implementation; it will be due to these issues.
Considering that half the legislative assemblies too have to agree on the GST and all the constituents are educated about the same and gear up to fit into the frame, it should not be surprising in case the implementation is from 2018 onwards. Starting in 2017 and run it parallel to the existing system in parallel will probably also be a solution as it may be more effective in addressing the glitches by 2018.
But for sure, we should have this bill passed in the monsoon session.
(The writer is Chief Economist, CARE Ratings. Views are personal)
Editor's Note: This article was originally published on 13 July. It is being republished in light of the Monsoon Session in Parliament that begins on Monday - 18, July.
Updated Date: Jul 18, 2016 11:33 AM