The political rancor over demonetization in Parliament is casting a long shadow over Goods and Services tax (GST) rollout from the beginning of next fiscal. With both the Houses uble to conduct any business due to the continuing standoff, time is fast running out for in-depth discussion on a supposedly major reform measure that will integrate India into a common market. The 122nd Constitution amendment bill passed by Parliament last October changed the overarching principle of indirect taxation in the country. It aimed to put an end to a system under which commerce between states was treated as virtual exports and imports. After all, levying of multiple taxes across state borders had long made goods and services costlier, rendered trade needlessly complicated, provided loopholes for tax evasion and left the country economically fragmented. But passage of the constitutiol amendment bill to remove different layers of Central and state governments’ exclusive powers to levy taxes had to be followed by subordite legislation. There are four pieces of supporting legislation — the central GST (CGST), compensation for revenue losses to states and integrated GST (IGST) bills that have to be passed by Parliament, while the state GST (SGST) bill requires the nod of state legislatures. Before this however, the details of all these legislations will have to be threshed out and approved by the GST council, which is chaired by the Union Fince minister and comprises of Fince or other ministers nomited by state governments. So far, the GST council has been trying to hammer out a consensus on a 4-tier GST structure with luxury items and demerit goods (like tobacco) to be taxed at 28 percent, two standard tax rates of 18 and 12 percent, lowest rate of 5 percent for common use items, and zero tax for essentials like foodgrains. The maximum 28 percent GST rate addressed the political demand for a rate cap on GST. But another major disagreement has emerged over the issue of ‘dual control’ — with the Centre favoring a vertical division formula to tax assesses, while several states notably non-NDA ruled ones like Bengal, Kerala and Tamil du demanding horizontal division under which taxpayers with less than Rs 1.5 crore annual turnover will be taxed by states. But since 85 percent VAT assessees and 93 percent service taxpayers have turnover below Rs 1.5 crore, the Centre is unwilling to let go of the option to tax this majority chunk.
In the initial stages of negotiation at the GST council, the Centre had reportedly agreed to the states’ demand to tax up to this limit. Over this limit, both the Centre and states would have power in case of goods, while in case of services, the Centre will have sole power to tax till the time the states acquire sufficient expertise to do so. But that tentative agreement later broke down, and presently the stalemate has acquired political dimensions over the demonetization issue. The Fince ministers of Trimool-ruled Bengal and Left-ruled Kerala have taken the stand that Prime Minister rendra Modi’s currency flushout move will bring down the country’s economic growth by 2 percent, which can translate to production losses of over Rs 2.5 lakh crore. In such a scerio, states will be badly hit and will struggle to fund welfare programmes, thereby requiring greater compensation to adopt GST. But how will greater compensation come about if tax collections of states and the Centre are adversely affected by demonetization, the two state Fince ministers have asked. Union Fince minister Arun Jaitley has hit right back, asserting that the present system of each taxpayer getting assessed thrice (including VAT and central excise) must end, and the new GST system must be in place latest by September 16 next year as mandated constitutiolly. He has also called upon states not to oppose every reform ‘for the sake of opposition, because that makes investors wary’. It is now being speculated that after the GST council meet scheduled on December 12, the NDA government may again go for the money bill route to pass the supporting bills in Lok Sabha, like it did with the Income Tax amendment bill recently to tax those declaring uccounted wealth. But GST is a much larger and complex issue, involving as it does the right to tax manufacture of goods, provision of services and consumption — over which Central and state governments had long enjoyed their exclusive turfs. Considering the parlous finces of many states including Assam, all stakeholders need to tread carefully on GST issue without allowing politics to get in the way.