Politicking over tax regime

BRP Bhaskar
Gulf Today

When a new tax regime introduced after three decades of debate calls for review and revision within four months, it is evident that the authorities did not act with due diligence. That is what happened with the Goods and Services Tax.

A major overhaul of tax on goods was proposed first by former Prime Minister VP Singh in 1986 while serving as Finance Minister in Rajiv Gandhi’s government. Liberalisation and globalisation were not under consideration at that time. 

Globalisation put service tax also on the agenda. In 2000, Atal Behari Vajpayee, the first Prime Minister belonging to the Bharatiya Janata Party, proposed a goods and services tax regime and set up a committee to design an appropriate GST model for the country.

The committee was headed by Asim Dasgupta, a US-trained economist who was Finance Minister in West Bengal’s Communist Party of India (Marxist)-led government. Before he quit in 2011, following his - and his party’s - defeat in the State Assembly elections, the committee is said to have completed 80 per cent of the work.

Introduction of GST was one of the programmes taken up by the Manmohan Singh government during 2004-2011 as part of the reforms package, and it attempted to enact legislation for the purpose. It could not make much progress because of the stiff opposition from various political parties, including the BJP.

One of the vagaries of India’s democratic system is the propensity of political parties to shift their position on programmes, depending upon whether they are on the treasury benches or on the opposite side. After the change of government at the Centre in 2014, the BJP started pushing the GST project.

The Congress did not turn against it but it raised issues about the structure proposed by the GST committee, leading to further delays. It wanted an 18 per cent cap on GST but this was not acceptable to the government.

Unlike Manmohan Singh, who often shelved reforms, especially when critics pointed out they might hurt the poor, Modi was willing to ram them down. He pushed through the required enactments, including a Constitutional amendment, and ushered in the GST regime on July 1.

While most countries have uniform GST, taking into account the size of the country and the complex ground situation, a three-tier system, comprising a Central GST, a State GST and an Integrated GST, income from which was shared by the Centre and the State, was brought in.

Soon there was an avalanche of complaints from all over, especially about the tax on services, which was new to the country. The high rates of tax which added to the cost of living also came under attack.

Complaints poured in not only from consumers but also from business houses who found the system of filing returns too cumbersome. Evidently the official machinery had not paid adequate attention to the details.

Last week the GST Council, comprising Finance Ministers of several states, reviewed the tax structure and decided to revise the tax rates drastically. It also agreed to simplify the filing procedures.

Under the original scheme, as many as 228 goods and services attracted the highest rate of 28 per cent. The Council brought down the rate on most of them to 18 per cent, leaving only 50, mostly luxury items, beverages and tobacco products, in the highest slab. The rate on many items which attracted 18 per cent was lowered to 12 per cent. 

The biggest relief for consumers was slashing of the tax on bills of restaurants other than those in five-star hotels from 28 per cent to just five per cent. The tax on five-star restaurant bills was also reduced, but to 18 per cent only. 

For the governments at the Centre and in the states, the GST is a major source of revenue. They stand to lose an estimated Rs 200 billion a year as a result of the rate revision.

Congress Vice-President Rahul Gandhi said it was his party’s campaign that led to the rate cuts. Former Finance Minister P Chidambaram claimed the upcoming Assembly elections in Gujarat, Modi’s home state, had forced the Centre to give in.

Assam Finance Minister Himanta Biswa Sarma, who heads the GST Council, dismissed Chidamabaram’s claim as childish. He said the 28 per cent slab would be phased out. 

In the prevailing political climate, it is idle to hope that politicians will stop making GST a partisan issue. --Gulf Today, Sharjah, November 14, 2017.

Indian common market is born

BRP Bhaskar
Gulf Today

With the catchy slogan “One Nation, One Tax, One Market”, the Indian government ushered in a new national tax regime at a midnight ceremony last week.

Unlike demonetisation of high-value currency, undertaken eight months ago without adequate preparations, the tax reform was launched after long deliberations.

The new tax regime is essentially a continuation of the reforms initiated by Manmohan Singh as Finance Minister in PV Narasimha Rao’s government a quarter-century ago. It will benefit foreign firms setting up facilities in the country by providing a uniform tax structure regardless of where they are located.

The first step towards introduction of a national goods and services tax (GST) scheme was taken by Prime Minister AB Vajpayee in 2000 when he set up a panel to design a suitable model. Strong opposition from state governments, which feared loss of revenue as well as limitations on their taxation powers, made the going tough.

Modi, who, as Chief Minister of Gujarat state, had stood against the Manmohan Singh government’s bid to introduce GST, changed his stand on becoming the Prime Minister and decided to push it as part of his economic reform package. Replying to Opposition taunts about the shift in his position, he said he had some misgivings about the scheme. As a Prime Minister who had been a Chief Minister he could address the states’ concerns on the issue, he added.

In 2015 the Modi government set April 1, 2016 for rolling out GST. The Constitution needed to be amended to introduce it. The ruling coalition could easily get the amending bill through the Lok Sabha, where it has a majority. It was not until August 2016 that it could enlist the support of the Congress which was necessary to push the bill through the Rajya Sabha.

The Centre still had to conduct tricky negotiations with the states to work out details of the new tax regime. It is entitled to credit for completing the process speedily and making GST a reality by July 1.

Conceived as a multi-stage, destination-based tax, GST is levied on every value addition. The final consumer, it is claimed, will bear only the GST charged by the last dealer in the supply chain.

Does that mean the consumer will pay less for goods and services? Or will he end up paying more? There is no simple, straight answer to the question.

Contradictory trends are already in evidence. Some items now cost more and some others less. The biggest automobile producer announced a three per cent cut in the prices of some models, supposedly to pass on GST benefits to the customers, but hiked the prices of some other models by Rs 100,000.

With an estimated population of 1.34 billion, India constitutes a big market. As the national economy is growing rapidly, the market bids fair to be even bigger. But the “one nation, one tax” bit is not quite true.

There are actually three GSTs – a Central GST, a State GST and an Integrated GST – levied by the Centre on inter-state supply of goods and services. Also, there is wide variation in the tax rates.

There is no levy on several items and bullion attracts a low three per cent tax. Four slabs, of five per cent, 12 per cent, 18 per cent and 28 per cent, have been fixed for other goods and services. There is also a cess to raise money to compensate the states for revenue loss.

No other country with a GST regime has so complex a tax structure and such high rates as India has opted for. The rate is six per cent in Malaysia, seven per cent in Singapore, seven and a half per cent in the US, 15 per cent in New Zealand, 17 per cent in China and 19 per cent in Germany. Brazil has two rates: seven per cent and 12 per cent.

Economic analysts have said that the GST scheme is full of imperfections. One of them is the compromise with the states which has resulted in the exclusion of petroleum products, liquor and real estate development from GST.

The coming weeks will show if the preparations made for the switch to the new tax regime were adequate or will bring needless suffering to the people, as happened with the demonetisation programme. It did not yield the anticipated benefits but caused immense hardship to the people, especially the poor. --Gulf Today, July 4, 2017.