GST Bill: Will Chidambaram's pro-poor 18% rate barb put NDA in a spot?

That the Congress party has clearly done its home work for the Goods and Services Tax (GST) discussion on Wednesday is clear from former finance minister P Chidambaram’s speech, which offers a few critical lessons and warnings for the GST hopefuls in the BJP camp.

For one, the BJP has to be prepared to settle for a standard GST rate that doesn’t exceed 18 percent in any case. Secondly, it should be prepared to include that rate in the GST Bill with a clause that any future change in the rate can be made only by Parliament, not by executives.

 GST Bill: Will Chidambarams pro-poor 18% rate barb put NDA in a spot?

P Chidambaram. PTI file photo

Both these comments are critical since the government hasn’t yet formalised the standard GST rate. Also, there is no clarity yet on how exactly the subsequent process of GST legislation, including the constitution of the central GST Bill and interstate GST Bills, will be carried out.

What the Congress has done now is playing clever using the recommendations of the government’s own economic advisor’s recommendations to make a strong case for a GST rate not exceeding 18 percent. Subramanian had proposed a standard GST rate of 18 percent and revenue neutral rate of 15-15.5 percent.

The CEA also recommended a concessional rate of 12 percent for public goods that concerns the deprived or weaker sections and a rate of 40 percent for luxury items and tobacco, aerated drinks and pan masala etc. Chidambaram, thus, hits the core point in his GST speech — the final GST rate at 18 percent, by invoking Subramanian’s CEA’s proposals, which the government cannot ignore.

"I, on behalf of my party, loudly and clearly demand that the GST rate should not exceed 18 percent," Chidambaram said in the Rajya Sabha.

"The worry that we have is creeping taxation. But that is what Parliament is for. Taxation is the exclusive power of the Parliament. It is ultimately Parliament which calls the shots in taxes," said the former FM, who first announced GST in his 2006-07 budget.

"When this Bill is passed today, we will prepare for the next stage of the debate, which is the Central GST Bill. I want an assurance from the Finance Minister....This is a very important legislation. I want an assurance that when that Bill is brought, that will be brought as a Financial Bill and not as a Money Bill," Chidambaram said.

In simple words, Chidambaram has made it impossible for the BJP to decide a standard GST rate above 18 percent for whatever reasons. This part is crucial since the Centre has to battle with different pressure groups and the state governments before arriving at a final standard rate. And it hasn’t done so yet. The standard rate is the rate which will impact 70 percent of the goods and services and hence most critical for general public.

There is no clarity from the government’s side on the standard rate yet. Too high a rate will hurt the service industries and consumer and too low a rate will kill the revenues of manufacturing states. All this while, there has been huge lobbying by manufacturing states to keep the rate at the higher end. What about the common man? He will see pain on the household kitty in the short term if the rate is kept too high. It’s a difficult call for the government to take, especially ahead of crucial state polls next year.

Can the Narendra Modi government assure the Congress, the principal opposition, that the final rate will be 18 percent? If it doesn’t, will the Congress back out from the consensus path?

The Centre's task looks much 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 Jaitley that they will be compensated in full for five years. Kerala finance minister, Thomas Isaac, in an interview to CNBC TV 18, said that most states want a standard GST rate above 20 per cent. If one see this in the context of Chidambaram's comment, the significant of 18 per cent becomes evident.

Chidambaram symbolises the Congress party’s firm resolve that it wants to be seen as having a critical say as the GST episode unfolds. He positions the party as the voice of poor and emphasize on the fact that his party is speaking for the poor. Chidambaram attacks the Narendra Modi government saying it doesn’t care about the problems of the common people.

Chidambaram stresses the point that the rate should be changed only with the permission of Parliament, and thus reiterating the Congress’ compromise formula that the GST rate should be included in the GST Bill at least, if not the constitution. Chidambaram warns too high a rate, something like 23 percent, will be inflationary.

The point we shouldn’t be miss here is that the Congress is pitching for 18 percent standard GST rate, which will apply to most of the goods, and isn’t ready to give up on this point in any case.

It is needless to say how critical is the Congress’ support is for the BJP to pass the GST Bill. The entire GST wave is now riding on the Congress’ support. Even the opposition from regional powerhouses such as J Jayalaithaa’s AIADMK to GST does not matter as long as the Congress is on the government’s side.

But every member’s opinion matters, if that isn’t the case. The big question at this stage is can the Modi-government, especially finance minister Arun Jaitley, offer a convincing reply to Chidambaram’s demands to proceed in the GST consensus path.

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Updated Date: Aug 03, 2016 17:01:37 IST