Why the GST Bill may be flawed and conflicted

The government aims to launch its “biggest tax reform since 1947”– through the passage of the “landmark” Constitution (122nd Amendment) Bill, 2014 in Parliament for the introduction of the new goods and services tax (GST). The Bill could be passed in the second part of the Budget session that began on April 20, if supported by two-thirds majority in both Houses with ratification by 50% of the state legislatures.

According to Finance Minister, Arun Jaitley, GST, “which has the potential to push India’s GDP by one to two per cent”, will be launched on April 1, 2016.

However, on the eve of this historic passage, many aspects of the Bill appear to be deeply conflicted, subverting its objectives -- of a significant contribution to Asia's third-largest economy by lowering the overall tax rate and broadening the tax base while concurrently replacing multiple, complex state levies.

For instance, the very definition of GST, revised under a new Clause 12A in Article 366 of the GST Bill is dangerously flawed. “Goods and services tax” means any tax on supply of goods or services or both, except taxes on the supply of the alcoholic liquor for human consumption”.

Once you get over the bad grammar (use of the preposition “the” twice) the implications of this definition sink in. Taxes are normally levied on a “sale” or a “transaction”, not on “supply”. Supply here includes “self supply”. With this, India has become the first country in the world proposing to tax “supply” without any reference to value addition or commercial transaction. The Bill makes no attempt to define “supply” or restrict it to commercial transactions alone. This could lead to bizarre outcomes – like muzzling free speech or having to cough up GST if you move house. Free speech is compromised since journalists/columnists/activists “supply” views and opinion which become taxable even if provided free of charge, as in the case of social media.

Similarly, in a corporate office, the “supervision” of operations by its Board/senior managers across the company’s offices in different parts of the country can also become a taxable service by allowing each state to raise a GST demand on the company. Corporates are afraid this will increase valuation disputes since tax departments of different states are prone to valuing and taxing free services produced and consumed within a company like payment of invoices. Especially since states are not bound by the Centre or GST Council under the new provisions.

Also contentious is qualifying tax as “any”. If “any” tax on goods and services qualifies as GST, then both central and state governments have the freedom to levy multiple taxes in perpetuity while publicly claiming that GST is a single tax. Clearly, “any” needs to be deleted.

The government is very silent on why it has chosen to keep liquor, electricity, petroleum (till notified) and possibly even real estate outside the purview of GST. If this is a path breaking tax system, why are certain sectors deprived of its benefits? Wasn’t the GST meant to be all encompassing? The real estate sector, in particular, contributes to the largest generation of black money and Prime Minister Narendra Modi has publicly sworn to cleanse the country of this evil. Should the GST be designed to thwart the PM’s objectives by excluding these sectors?

The exclusion of large and lucrative sectors, by drastically reducing the tax base, is also most likely responsible for pushing up the GST rate to 27% from the revenue neutral rate of 12% (7% for state GST and 5% for central GST) proposed in 2010. While the government’s defense will be that the states had opposed the 12% rate for being too low, the 27% level carries a huge inflationary impact, threatening to reduce demand and slow growth rather than boosting GDP. Negotiations are on with state governments for a consensus on the final rate. While states are negotiating for a rate higher than 27%, a deal could eventually be struck in the region of 20%, which is also high, considering the global average GST/VAT rate is 16.4%, the average rate in Asia-Pacific is 9.88% and Canada and Nigeria are at just 5%.

The government’s sweetener for the states is equally a non-starter. According to industry evaluation, an additional 1% non-refundable and non-creditable levy on supply of goods and services in course of inter-state trade and commerce proposed in Clause 18 of the Bill will lead to a net 3%-7% additional tax on manufacturing activity, which directly threatens the government’s pet ‘Make in India’ mission. For example, purchasing cloth in Delhi, transporting it to a tailoring unit in NOIDA, UP and selling the garment in Gurgaon, Haryana, is a straight 3% additional levy which importers will not pay, placing the domestic manufacturing supply chain at a disadvantage. The way out of this mess is to delete Clause 18, since Clause 19 guarantees states compensation in case of any revenue loss from GST.

Industry has additionally flagged Article 246A, Article 270, Article 279A, Article 366 for clarification/amendment and suggested that the use of “trade and commerce” in various clauses of the Bill be replaced by “economic activity” on grounds that “trade and commerce” does not encompass professions or vocations which are intended to be taxed under GST.

The multiple glitches are inexplicable considering discussions on the GST have been on since 2008. The UPA government tabled the Constitution Amendment Bill in 2011, but was unable to get the Bill passed due to lack of consensus.

The NDA government went on to introduce the GST Bill in Parliament in December 2014, sans any major or public multi-stakeholder discussions -- even with those who are most impacted -- industry and consumers. Several suo moto letters and representations by the industry have also gone unacknowledged. Given the implications and contentious history, it is baffling that the exercise involving the Bill continues to be shrouded in secrecy.

If introduced in its present form, skewed inflationary pressures arising from the launch of GST will flare up in 2017 just before the next general elections in 2019, well timed to kick-off a crippling political fallout for the NDA government. That, it seems, could be the only reason to prompt the government to wake up and smell the coffee!

The author is a senior journalist