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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- Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition, a collective of the United States, United Kingdom and Norway governments, came up with a $1 billion fund.
- LEAF is supported by transnational corporations (TNCs) like Unilever plc, Amazon.com, Inc, Nestle, Airbnb, Inc as well as Emergent, a US-based non-profit.
- The world lost more than 10 million hectares of primary tropical forest cover last year, an area roughly the size of Switzerland.
- Ending tropical and subtropical forest loss by 2030 is a crucial part of meeting global climate, biodiversity and sustainable development goals. Protecting tropical forests offers one of the biggest opportunities for climate action in the coming decade.
- Tropical forests are massive carbon sinks and by investing in their protection, public and private players are likely to stock up on their carbon credits.
- The LEAF coalition initiative is a step towards concretising the aims and objectives of the Reducing Emissions from Deforestation and Forest Degradation (REDD+) mechanism.
- REDD+ was created by the United Nations Framework Convention on Climate Change (UNFCCC). It monetised the value of carbon locked up in the tropical forests of most developing countries, thereby propelling these countries to help mitigate climate change.
- It is a unique initiative as it seeks to help developing countries in battling the double-edged sword of development versus ecological commitment.
- The initiative comes at a crucial time. The tropics have lost close to 12.2 million hectares (mha) of tree cover last year according to global estimates released by Global Forest Watch.
- Of this, a loss of 4.2 mha occurred within humid tropical primary forests alone. It should come as no surprise that most of these lost forests were located in the developing countries of Latin America, Africa and South Asia.
- Brazil has fared dismally on the parameter of ‘annual primary forest loss’ among all countries. It has lost 1.7 mha of primary forests that are rich storehouse of carbon. India’s estimated loss in 2020 stands at 20.8 kilo hectares.
- Between 2002-2020, Brazil’s total area of humid primary forest reduced by 7.7 per cent while India’s reduced by 3.4 per cent.
- Although the loss in India is not as drastic as in Brazil, its position is nevertheless precarious. For India, this loss is equivalent to 951 metric tonnes worth carbon dioxide emissions released in the atmosphere.
- It is important to draw comparisons between Brazil and India as both countries have adopted a rather lackadaisical attitude towards deforestation-induced climate change. The Brazilian government hardly did anything to control the massive fires that gutted the Amazon rainforest in 2019.
- It is mostly around May that forest fires peak in India. However, this year India, witnessed massive forest fires in early March in states like Odisha, Uttarakhand, Madhya Pradesh and Mizoram among others.
- The European Union’s Copernicus Atmospheric Monitoring Service claimed that 0.2 metric tonnes of carbon was emitted in the Uttarakhand forest fires.
- Implementation of the LEAF Coalition plan will help pump in fresh rigour among developing countries like India, that are reluctant to recognise the contributions of their forest dwelling populations in mitigating climate change.
- With the deadline for proposal submission fast approaching, India needs to act swiftly on a revised strategy.
- Although India has pledged to carry out its REDD+ commitments, it is impossible to do so without seeking knowledge from its forest dwelling population.
Context:-
At the recently concluded Leaders’ Summit on Climate in April 2021, Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition, a collective of the United States, United Kingdom and Norway governments, came up with a $1 billion fund plan that shall be offered to countries committed to arrest the decline of their tropical forests by 2030.
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]What is LEAF Coalition?
Why LEAF Coalition?
Brazil & India
According to the UN-REDD programme, after the energy sector, deforestation accounts for massive carbon emissions — close to 11 per cent — in the atmosphere. Rapid urbanisation and commercialisation of forest produce are the main causes behind rampant deforestation across tropical forests.
Tribes, Forests and Government
Disregarding climate change as a valid excuse for the fires, Indian government officials were quick to lay the blame for deforestation on activities of forest dwellers and even labelled them “mischievous elements” and “unwanted elements”.
Policy makers around the world have emphasised the role of indigenous tribes and local communities in checking deforestation. These communities depend on forests for their survival as well as livelihood. Hence, they understand the need to protect forests. However, by posing legitimate environmental concerns as obstacles to real development, governments of developing countries swiftly avoid protection of forests and rights of forest dwellers.
For instance, the Government of India has not been forthcoming in recognising the socio-economic, civil, political or even cultural rights of forest dwellers. According to data from the Union Ministry of Tribal Affairs in December, 2020 over 55 per cent of this population has still not been granted either individual or community ownership of their lands.
To make matters worse, the government has undertaken systematic and sustained measures to render the landmark Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 ineffective in its implementation. The Act had sought to legitimise claims of forest dwellers on occupied forest land.
Various government decisions have seriously undermined the position of indigenous people within India. These include proposing amendments to the obsolete Indian Forest Act, 1927 that give forest officials the power to take away forest dwellers’ rights and to even use firearms with impunity.
There is also the Supreme Court’s order of February, 2019 directing state governments to evict illegal encroachers of forest land or millions of forest dwellers inhabiting forests since generations as a measure to conserve wildlife. Finally, there is the lack of data on novel coronavirus disease (COVID-19) deaths among the forest dwelling population;
Tardy administration, insufficient supervision, apathetic attitude and a lack of political intent defeat the cause of forest dwelling populations in India, thereby directly affecting efforts at arresting deforestation.
Way Forward
Tuntiak Katan, a global indigenous leader from Ecuador and general coordinator of the Global Alliance of Territorial Communities, aptly indicated the next steps at the Climate Summit:
“The first step is recognition of land rights. The second step is the recognition of the contributions of local communities and indigenous communities, meaning the contributions of indigenous peoples.We also need recognition of traditional knowledge practices in order to fight climate change”
Perhaps India can begin by taking the first step.