The passage of the constitutional amendment enabling the Goods and Services Tax Bill, that will empower the Centre and states to go ahead with this far-reaching reform, is an example of what can be done if there is give and take by the Centre and states. Former finance minister P. Chidambaram referred to this when he said in the Rajya Sabha during the GST debate how finance minister Arun Jaitley earlier tried to bring in GST without consulting the Opposition, but had to be more accommodative as the BJP needed Opposition support to enact it. Mr Jaitley, in a way, had to “stoop to conquer”.
GST will be a game-changer, and one of the most revolutionary and transparent tax reforms in India since Independence, or at least since the 1991 reforms. It subsumes all taxes levied by the State and makes India a single market, benefiting 1.3 billion consumers as well as manufacturers. It’s a leap forward in the ease of doing business, which will be welcomed by foreign investors.
However, as several speakers noted in the Upper House debate, the GST has its faults too. The government has to assure the states that they will be fully compensated over the loss of revenue. GST will deprive states of the right to raise taxes in case of calamities or other emergencies. They will have to go to the Centre with a begging bowl for help. There would also have to be a 18 per cent cap on the GST rate, which was also suggested by the chief economic adviser.
But the issue that really concerns the poor is that GST will raise indirect taxes which, as is well known, hurt the poor more. They pay the same taxes on goods and services as the rich. It’s ironic that in developing countries like India indirect taxes are higher than direct taxes, while in developed countries direct taxes are higher. In India, direct taxes (income-tax, professional tax etc) account for a mere 37.7 per cent of total tax receipts, while 62.3 per cent comes from indirect taxes. Smaller companies and small and medium enterprises will also be killed by the high GST rate. It will also hurt the services sector, that now pays 14.5 per cent tax. The beneficiaries will be sectors like logistics, auto, cement, real estate and auto ancillaries.
The government must put in place a disputes resolution mechanism before the Winter Session in November, when the bill is taken up for discussion. The amendment has skirted a definitive creation of such a mechanism headed by a retired high court judge, that is a basic requirement. Mr Jaitley is said to be wary about giving the judiciary a role in determining taxes. That has no justification.
