GST deadlock: CEA panel report indeed has solutions but may create new headaches too

The committee headed by Arvind Subramanian on goods and services tax (GST) rates has shown how there can be progress on this purportedly game-changer tax. They certainly give both the government and the Congress a way out to formally drop their entrenched positions and arrive at a compromise, enabling the passage of the Constitution amendment Bill to pave the way for GST. But beyond that, will these recommendations lead to a better GST regime? That’s not very clear, going by just the executive summary (which alone is in the public domain right now) and Subramanian’s press conference. [caption id=“attachment_2419248” align=“alignleft” width=“380”]  CEA Arvind Subramanian. PTI[/caption] Some experts have even questioned the political feasibility of these recommendations, which may make it difficult for them to clear the empowered committee of state finance ministers hurdle. Minister of state for finance Jayant Sinha and economic affairs secretary have both said the report will have to be discussed by the empowered committee. Interestingly, at the start of his press conference, Subramanian had cautioned that the report is not the last word on this issue and that it would have to be studied by experts. To recap, the government and the Congress were at loggerheads on three issues: One, the GST rate. The Congress said this should be capped at 18 per cent. The Subramaniam panel has recommended a standard rate of 17-18 per cent applicable to most goods and all services. See the details of the recommendation on rates in this article . Two, the Congress wanted this cap to be specified in the GST Bill, which the government understandably refused, saying any future tweaking of the rate will require parliamentary approval and consent of state governments. The panel too has said the suggestion is not wise. Three, the government was insisting on a 1 percent additional levy on inter-state movement of goods, in the face of not only opposition from the Congress but also criticism by experts. The committee has advised against this. But can the finance ministry take a call on the report on its own without consulting the state governments? And will the state governments agree to the two-rate formula the committee has proposed? Doubts have been raised on the assumptions on the revenue neutral rate (RNR, or the rate at which current revenues are maintained) of 15-15.5 per cent and the standard rate. Both are based on the low rate for ‘merit goods’ at 12 per cent. But this really means almost doubling the current rates on these goods, something that states might find difficult to accept. Pinaki Chakraborty of the National Institute of Public Finance and Policy (NIPFP) feels that instead of suggesting a 12 per cent low rate with a 15 per cent RNR and another high rate of 17-18 per cent, a technical report of this kind should have kept just a few commodities in the lower rate and moved up most of the others to the higher rate. This, he says, would have led to a lower RNR and standard rate and also created a clean system of GST. But what happens if state governments don’t agree to reduce the number of items in the low-rate list or double the low rate? That could mean that both the 15-15.5 per cent RNR and 17-18 per cent standard rate go for a toss, once again putting a question mark over the Congress support to the GST bill and GST itself. Besides, any increase in rates is bound to lead to lower compliance. Academic arguments about how there will always be winners and losers and what people lose in terms of higher taxes will be made up somewhere else may be fine, but people will immediately start looking for ways to avoid paying tax. As it is, the billing culture in the country is abysmal. NIPFP professor Kavita Rao had told this writer last year that, “somewhere integral, or subsequent, to the introduction of GST we have to address the issue of how we will improve the billing culture in the country. Without addressing the question, the transformation effect will not be fully realised.” What’s also not clear in the Subramanian panel report, says D. K. Srivastava chief policy advisor at Ernst & Young, is whether compensation to the states will be built into the central rate or whether resources for it will be found from other central revenues. Actually, a NIPFP study in 2007 had factored in a compensation for loss of central sales tax revenue (assumed at 4 per cent) and had arrived at a single rate RNR of 17-18 per cent. The Subramanian panel appears to have arrived at 15-15.5 per cent RNR without this compensation. “The RNR will depend on how this critical matter is treated. Without clarity on this, a major issue has been bypassed,” says Srivastava. The assumptions, Subramanian had explained at his press conference, had taken into account all tax exemptions at the central level (which have been subsumed into the GST) but not the exemptions given by the states. This is an important issue – if states do away with exemptions, this could bring the rate down further. Another difficult political sell could be the recommendation about not having bands of rates (which states are in favour of), on the grounds that states retain considerable flexibility and autonomy. “Eliminating the idea of band rate will take effectively all revenue autonomy away from the states and hand it over to the GST Council,” says Srivastava. There are a lot of motherhood statements in the report - case for ending the exemption raj, bringing more commodities and services under GST, not judging the success or failure of the GST over short horizons. Ultimately, the report appears to be a good political exercise designed to remove one political obstacle and help the government win the race against time. But, in the process, has it erected other political hurdles and created a flawed GST structure? One will have to wait till the entire report is made public before making a final judgement.