Relax, Mr Jaitley: Here’s Why You Should Not Try To Push GST In A Tearing Hurry

After proceeding at blazing speeds over the last three months, the goods and services tax (GST) bandwagon has hit a speedbreaker - a growing trust deficit between Centre and states. One has made this point before, that GST is not just an economic reform; it is a huge federal compromise, and thus has enormous scope for exacerbating centre-state conflict. It is thus best to hasten very, very slowly.

The attitude Finance Minister Arun Jaitley and Prime Minister Narendra Modi must adopt is one of immense patience and understanding. The Centre must avoid setting artificial deadlines when states are unwilling to be rushed into an agreement at the GST Council, especially when no one is sure how they will be impacted.

If the deadline of April 2017 is difficult to meet, so be it. Politically it would be wise to postpone it to even June 2019, when the next election is out of the way. Any delay beyond June 2017 means the GST will still be suffering teething troubles till mid-2018, and maybe even after that. And if states and Centre, not to speak of small businesses and governments, are embroiled in disputes, Modi can kiss goodbye to 2019. Trust deficits should be handled at the start of an administration, not when the only things politicians can see are elections and more elections.

The key points of contention are the upper slab for GST (currently proposed at 26 per cent by the Centre), the cess to enable Jaitley to compensate states for any loss of revenue, and, most importantly, the question of jurisdiction (who will have control of taxpayers).

Of the three, the 26 per cent ceiling rate – already too low compared to the 40 per cent non-merit rate proposed by the Arvind Subramanian Committee – will be the easiest one to obtain agreement on. It will be no big deal raising this to 28 per cent or even 30 per cent, as the Kerala Finance Minister, Thomas Isaac, has demanded.

The cess issue can also possibly be handled sensibly, either by the Centre accepting a higher and more flexible fiscal deficit limit in the initial years of GST, or by raising the average GST rate by 1-2 per cent.

But what cannot but lead to heartburn is the trust deficit created by the issue of control and jurisdiction. Here, as Isaac pointed out in an article in The Indian Express recently, the states are not on board.

At the first meeting of the GST Council in September, it was agreed that services would be administered by the Centre, and GST on goods for firms with less than Rs 1.5 crore turnover would be handled by states. For goods above this level, both Centre and states would exercise joint jurisdiction.

But the states are now suspecting that the Centre is getting a better bargain than them. Isaac wrote in the Express: “The raising of the threshold limit from Rs 10 crore to Rs 20 crore (for goods) has resulted in the removal of 33 lakh proportion (sic) of goods taxpayers from the state administration. Besides, the Centre is getting access to 12 lakh dealers from the VAT net. With services and IGST (inter-state GST) entirely with the Centre, the Central government’s 40,000 workforce gains more dealers than states with five times more workforce than the Centre. The so-called conclusion reached in the first Council meeting has been abandoned by all states.”

There are two issues here: one, in order to make GST truly simple and easy to administer, the fewer the number of items in joint jurisdiction the better. But there is also the issue of federalism, where states cede more control to the Centre on goods. This knot is not going to be easy to untie, and either simplicity or federalism (or both) must be sacrificed.

Jaitley has a tough balancing act to do where states are reassured on their powers, even while ensuring that administering GST does not become a nightmare, with both Centre and states separately harassing businessmen by imposing double oversight. To be sure, this already exists in the case of goods, where excise and value-added tax (VAT) have dual jurisdictions. Maybe, the states will be willing to back off once the tax starts delivering higher revenues. Till then, Jaitley will have to allow states to retain control of a larger proportion of taxpayers than dictated by the needs of efficiency.

It is not difficult to see why states are adamant – their own bureaucracy. Everyone knows that in our corrupt system, tax sleuths often collect bribes by using their powers against hapless taxpayers. This is true both of Centre and states. Little wonder, the Central and state indirect taxes bureaucracies are fighting a rear-guard action to protect their turfs, if not expend them. It is no secret that some jobs in the VAT and excise collection departments often involve tax employees paying bribes in order to receive “lucrative” postings.

Meanwhile, West Bengal Finance Minister Amit Mitra has dropped another clanger. In a letter addressed to Jaitley, Mitra has raised another issue of trust-deficit: the delayed data on service tax. Mitra pointed out that the centre had earlier indicated that there were only 1.1 million service tax assessees, but now the number had risen to 3.05 million, including 2.64 million active taxpayers. “This implies that the service tax base has grown three times over two years. What is even more surprising is that even a month ago this fact was not told to states,” Mint newspaper quotes Mitra as writing in the letter.

Mitra has also complained that detailed figures on VAT, excise and service tax has not been shared with states, and even if this were to be done now, there would be very little time between now and the next GST Council meeting scheduled for 3 November (Thursday).

Reading between the lines, Mitra seems to be suggesting that the Centre is keeping its data releases to the last minute so that states are forced to take decisions without enough time to study them and come up with responses.

It may suit Jaitley to speed up decision-making by pressuring states to come to quick agreements on GST, but it is not wise politically or economically to do so. Trying to push states to do something will backfire if states find that they have been finessed by the Centre in some way or the other.

GST is going to be a reality, if not on 1 April 2017, a bit later. It is not worth sacrificing Centre-state ties – never very cordial - by rushing with the changes where states feel short-changed. Maybe the states are being too suspicious of the Centre’s motives right now, but in a federal set-up, and with a new tax that no one has experience with, this is surely understandable.

There is no tearing hurry to push GST so fast, Mr Jaitley.