New Delhi: The government’s proposal to allow manufacturing states to levy a 1% additional tax on supply of goods could undermine the ‘Make in India’ programme by encouraging imports rather than the inter-state movement of goods that the goods and services tax (GST) had been envisaged to facilitate, chief economic advisor Arvind Subramanian has warned.
At a press briefing on Tuesday, he also made out a strong case for an interest rate cut, given the visible improvement in the macroeconomic outlook.
“GST is a destination-based tax. This (1% additional tax) is an origin-based tax. So it sits very uncomfortably with the fundamental principle of GST. Second, the irony would be that sort of a provision would favour international trade over intra-national trade because every time a product crosses the border, it would have to pay extra non-vatable tax,” he said.
“Think about a product going to Gujarat from Tamil Nadu crossing four states, the product will embody additional tax of 4-5%. That might make it easier to import to Tamil Nadu from Bangkok or wherever. So in a sense it has the potential to undermine ‘Make In India’. So that’s why we need to look at this provision carefully. The period that we have gained to reexamine GST, some of these issues need to be looked at again.”
Subramanian was providing an interim update on the economy on the occasion of the Narendra Modi government’s first anniversary.
The additional 1% tax to the integrated GST, or IGST, was allowed to be imposed after producing states like Gujarat and Maharashtra argued that they will lose out to consuming states because of the destination-based nature of GST.
IGST, or the sum of central GST and state GST, will be levied on inter-state movement of goods and will be collected by the centre and later distributed to states.
Subramanian is known for his candid comments, which at times do not match with the public stand of the government. In an interview on 6 March after he presented his first Economic Survey, Subramanian justified the stand taken by his team backing foreign direct investment (FDI) in supermarkets. The ruling National Democratic Alliance is against this, although it hasn’t bothered to rewrite a 2012 policy of the previous government that allows 51% FDI in multi-brand retail.
“My preference would be yes. But then, that’s a political call. But as a purely technical and economic analysis, I think in the context of identifying these bottlenecks (in the agricultural markets), it is a desirable way to proceed,” he said then.
His stand on the GST was backed by Bipin Sapra, a tax partner at EY, an audit and consulting firm, who said the proposed 1% additional levy is an aberration and should be done away with because it does not conform with the design of the GST.
“Since states will be compensated for five years, there is no need for additional compensation through 1% tax, even if it is for two years. It is possible that after two years, manufacturing states will try some arm-twisting to further extend it,” he added.
Logjam on GST
The government was forced to form a committee of parliamentarians to study the constitutional? amendment bill to pave the way for GST on 12 May following a demand by opposition parties that command a majority in the Rajya Sabha. The bill has already been passed by Lok Sabha, where the government is in a majority.
The NDA wants to pass the bill in the early part of Parliament’s monsoon session so that it can roll out the GST on 1 April 2016. The Rajya Sabha select committee is expected to submit its report on the last day of the first week of the monsoon session, which is likely to begin in July.
After both Houses of Parliament pass the bill, at least half of India’s 29 states must ratify it, before sending it for the President’s assent. Following this, the centre will set up a GST council. Later, the centre and the states will have to pass separate bills so that the new tax regime takes effect.
GST aims to unify various central and state taxes, including the excise duty, service tax and value-added tax to create a common market.
The government introduced the bill in the Lok Sabha in December 2014, after claiming it had achieved a broad consensus with the states.
The centre has promised to compensate states for five years to allay concerns that they may lose revenue once GST is rolled out. It then inserted the provision to allow manufacturing states to levy the additional 1% tax on supply of goods for two years.
For now, GST will not apply to petroleum products.
Making rupee competitive
Subramanian said India should keep the rupee competitive if it wishes to succeed in the Make In India campaign, which is aimed at attracting foreign companies to manufacture in India for exports as well to sell in the domestic market.
Citing China’s example, he said the country is buying dollars to build reserves and cutting its interest rates aggressively to make its currency more competitive and promote growth. “China is now cutting interest rates quite aggressively to respond to its growth slowdown and that’s going to make its currency more competitive… So we need to respond accordingly,” he said.
Citing low inflation and a manageable fiscal deficit, Subramanian pitched for a rate cut by the Reserve Bank of India (RBI) at its monetary policy review meeting next week.
“Looking at the analysis of what is the inflation forecast, what is the fiscal consolidation, what is the international environment… and how monetary policy should respond, I think there is scope for monetary easing,” he said.
RBI kept its benchmark policy rate unchanged at 7.5% on 7 April and said it would wait for banks to pass on interest rate cuts that had already been announced before further easing. Some of the biggest banks in India have pared their base rate marginally since then.