The President has given his assent to the Constitution (One Hundred and First Amendment) Act, 2016, enabling the implementation of a nationwide goods and services tax (GST). The next steps for implementation of the GST need to be taken by the GST council, which will be constituted after the Act becomes effective. Like the small hinges which swing open massive vault doors, the council will be the gateway to the successful implementation of GST, the creation of a national market and sustained accelerated growth.
The council embodies a radical shift in structure, functions and responsibilities when compared to the empowered committee of state finance ministers, which has so far been coordinating GST issues.
The council is a constitutional body, with correspondingly onerous duties, outlined in Article 279A. It needs to operate in a transparent, predictable and consistent manner so that it commands the respect and credibility not only of its members but also of all the stakeholders across the GST spectrum—ranging from manufacturers, traders and service providers to consumers, civil society, academics and the nation at large.
Given that it will be the arbiter of most indirect taxes in India across the Centre and all states, it must aim to become a 21st century world-class institution epitomizing cooperative fiscal federalism at its best.
1. Rules of procedure
The council has crucial responsibilities relating to finalizing the tax base by recommending the goods and services to be exempted, the threshold for taxation, the revenue-neutral rate (RNR) and the rate structure.
These are far-reaching issues which will impact the economic interest of all the states and the Centre and will therefore be subject to intense debate. In the interests of its credibility and predictability, it is essential that the first item of business of the council should be to finalize its rules of procedure. The council’s functioning over the next six months/one year will be critical to the successful roll-out of GST.
2. Policy on compensation and delegated legislation
Incentives drive all human behaviour. State and Central governments are as susceptible as humans to the power of incentives in driving their behaviour in the council. The council needs to ensure that, as far as possible, there is a convergence of incentives among all its members before moving on to the main discussion on GST. This is best addressed by getting the compensation formula right and minimizing delegated legislation.
Parliament has to make a law to provide for compensation for revenue losses to state governments, based on the recommendations of the council. To ensure that its discussions on the structure and implementation of GST are not tainted with the problem of moral hazard, the council should, immediately after finalizing its rules of procedure, finalize its view on the payment of compensation.
All states may prefer payment of 100% compensation for all their losses for the full five years, the period mentioned in the amendment Act. This proposition should be resisted stoutly, as states may then become indifferent to the revenue collection under GST for this entire period.
This issue can be addressed best by providing for a tapered compensation formula: 100% in the first year, 75% in the second year, gradually tapering off to 25% in the last year. This will ensure that states have a strong, continuing and increasing stake in the success of GST. A similar compensation formula was adopted when value-added tax (VAT) was implemented in 2005.
3. Transparency and predictability
To promote investment and growth, changes in taxation policy should be transparent and predictable. There should be no vacuum of uncertainty. Manufacturers, traders, service providers and consumers all over the nation, and consequently, the economy will be affected by the recommendations of the council. Design features and changes to the system should be decided by the council only after following a prescribed procedure and giving due notice to all stakeholders.
Article 269A mandates the council to make recommendations on three issues which may have limited relevance to the GST roll-out.
These are (a) special rates to deal with natural disasters, (b) special provisions for the North-Eastern states, and (c) the date on which petroleum products will be subjected to GST.
To avoid uncertainty, the council may like to indicate when and in what manner it will address these three issues. For example, it could state upfront in which year it will recommend (or at least consider) inclusion of petroleum products in the GST base. To allow the new system adequate time to settle, it could also examine after what period or under what circumstances it will review its initial recommendations on GST rates. Given the preparatory steps required, it may be challenging to bring GST into place by 1 April 2017. The council should also recommend, based on its work plan as well as the need for providing lead time to trade and industry, the earliest possible date for the implementation of the GST in the country. These issues should form the basis of its transparency policy.
4. Inclusiveness
The council singularly is clothed with legislative, executive and judicial powers. It will recommend GST legislation, oversee implementation of the GST in the country and set up a mechanism to adjudicate disputes between its members.
These are sweeping powers, making it akin to a regulator for GST. It should, therefore, exercise its powers with the utmost inclusiveness. There are a number of steps that could be taken to ensure inclusiveness. These could include (a) putting up draft consultation papers in the public domain and inviting comments, (b) regularly inviting trade bodies, professional associations, academics and consumer forums to submit their view on issues being deliberated by it, (c) participating in information, education and communication programmes in association with state and Central governments, and (d) setting up an interactive and continuously updated website in all languages. These issues could form the basis of its inclusiveness policy.
5. GST law and the rate structure
The structure and content of the Central GST, inter-state GST and GST laws, the RNR and the rate structure, which are the subject of intense debate all over the country today, should only have the fifth priority in the council’s order of business. These decidedly important issues should be addressed only after the four issues outlined above have been addressed satisfactorily. This is so for two reasons.
First, without an enabling, conducive, predictable, and transparent environment in the GST council, productive discussion on the intricacies of the GST may be difficult.
Second, while it is relatively simple to determine the RNR for the Central GST, computing the RNR for states individually is difficult at best and impossible at worst.
There are difficulties in estimating the share of service tax of individual states given the lack of state-wise service tax collection data.
In any case, as was seen during the implementation of VAT, finance ministers are notoriously conservative in their estimation of their respective state’s RNR. Expectedly so, given the extreme dependence of state governments on indirect tax revenue. The RNR represents the rate which, when applied over the entire tax base, will generate the current revenue. Such an approach ignores the fact that the state and Central governments, being large consumers of goods and services themselves, will, through the application of lower taxes in the GST regime, reduce their expenditure significantly. To that extent, they may need to generate lower revenue to balance their budgets after GST is implemented.
State governments may, therefore, also like to look at the budget-neutral rate, the rate at which, given lower expenditure, their expenditure budgets remain neutral.
This will be lower than the RNR, and therefore provide a safety cushion for state (and Central) governments.
The Thirteenth Finance Commission had recommended an RNR of 12% over a broad base and with few exemptions.
The Arvind Subramanian panel had suggested an RNR of 15%. The actual rate structure will depend upon the exemptions and the threshold of the tax. Given the need to incentivize growth, it may be desirable to keep the RNR between 12% and 15%. And the GST rates will not be cast in stone. If necessary, they could be revised after a review undertaken by the council.
6. Capacity
The GST council will face significant challenges in addressing the issues identified above. Tax departments in most state governments often have limited staff resources to examine GST-related issues from their government’s standpoint.
The council needs to be aided by an independent and technically strong secretariat, not only to support the council’s requirements, but also to assist state governments in this regard. Given its stature as the body driving GST implementation in the country, the secretariat will need to be both financially as well as technically independent.
To this end, the Thirteenth Finance Commission had given a grant of Rs30 crore to the council’s predecessor—the empowered committee of state finance ministers. The council secretariat must be adequately staffed to enable it to independently propose, analyse and evaluate GST-related proposals so that it can provide objective advice to the GST council.
Conclusion
Over the last 66 years of the Indian republic, the Centre and the states have remained good fiscal neighbours. This is because the Constitution allotted mutually exclusive tax bases to each.
This tax fence between the Centre and the states is now being dismantled by the GST. For the first time, they will share a common indirect tax base, with the GST council providing the modality for doing so.
Whether such a sharing of tax base is both harmonious and sustainable will be the true test of the success of cooperative fiscal federalism in India. The GST council bears the heavy burden of proving that it can be so.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.