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Congress effort to trip Jaitley on GST bill may actually help improve it

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The goods and services tax (GST) bill – especially the constitutional amendment for introducing this tax – will be opposed by the Congress party for two reasons. One is political. The last thing the Congress wants it to give credit to the NDA for passing the most important tax reform in a decade.

But the other is economic logic – and here there is a valid reason for a rethink by the NDA on the bill passed by the Lok Sabha. The bill is currently in the hands of a select committee of the Rajya Sabha, and if it comes up with sensible changes, Finance Minister Arun Jaitley should accept most of them.

The GST bill as it now stands is a moth-eaten, messy compromise. Far from subsuming all important central and state taxes, it leaves many of them out (alcohol, petroleum), and additionally adds a 1 percent tax on inter-state sales of goods – a new distortion that will make the reform less reformist. This provision has been introduced at the behest of some manufacturing states like Gujarat and Maharashtra, now ruled by the BJP, since a GST tends to favour consuming states more than manufacturing states.

Let’s deal with the political opposition first. The Congress opposition is humbug, and is merely about paying the BJP back in its own coin now that it is in power. When in opposition, the BJP opposed the GST bill tooth-and-nail.

The Congress party resolution against the GST makes it clear that it is chary about giving the BJP an easy run over on GST. It blames the BJP for blocking the GST when the UPA was in power, and says its own justification for opposition to it now as principled. It says: “The present Constitution (122nd Amendment) Bill to allow for GST has several shortcomings that need to be addressed before it finally becomes law”.

It is obvious that this effort to find flaws in the bill stems from the political need to trip up the BJP, but, for once, this intervention may do some good.

Former finance minister P Chidambaram articulated his criticism of the BJP version of the GST bill eloquently, and he is making a lot of sense.

Among the main criticisms levelled by Chidambaram in a recent Indian Express article are the following:

One, the effective GST rate, if it is as high as 28 percent (which is the rumoured revenue-neutral rate), is “exorbitant”. According to Chidambaram, this rate should not be more than 18 percent. I entirely agree. If the rate is in the high 20s, the services sector will be badly impacted.

Two, too many items currently seem excluded from GST. Chidambaram says that excluding alcohol may be okay, but not petroleum. He is again right, but this is clearly a federalism issue and not just a screw-up by the NDA. The states, for example, collectively make more than Rs 1,50,000 crore from petroleum taxes. They are loath to give up this flexible revenue source in order to receive uncertain benefits from a better GST. Here the opposition is not just about the Congress, but almost all states.

Three, Chidambaram rightly criticises the 1 percent additional tax on inter-state sales as a “retrograde provision (that) negates the very character of GST (as) a destination-based tax.” Bang on.

Leaving Chidambaram’s minor carping aside, it is clear that the GST we now have is nowhere near its ideal form. So what should Jaitley do now?

There are two approaches to it.

One, he could say a moth-eaten GST is better than no GST at all and go ahead and try and get the states to swallow it in the hopes of changing it later. But with the Congress donning battle-gear, it is not certain the government will want to ram it through when the benefits are uncertain. Also, the assumption that the blemishes can be corrected later may not prove correct, since there are bound to be glitches in the initial years of GST, and the political fallout could be adverse.

The other option is to accept the Congress version in the select committee and shift the political onus on getting the opposition states on board to the Congress. Not that the Congress is likely to oblige, but at least the NDA can come out of it as a government willing to take suggestions from the opposition. It can save the gunpowder for later battles, especially on the Land Acquisition Bill. Compromise for the better will be good on GST.

But what will Jaitley do with the recalcitrants in his own party, who want the 1 percent tax on inter-state sales?

He could try this gambit: full compensation for five years if they are willing to give up the idea of this additional tax.

If GST is all that it is cracked up to be, compensating states for losses – if any – should be the norm, and not a favour. Even if this temporarily busts the fiscal math, it is in a good cause. At some point, GST will deliver more revenues to Centre and states. A great reform is worth creating some fiscal space for.

Source. FirstPost http://www.firstpost.com/business/congress-effort-trip-jaitley-gst-bill-may-actually-help-improve-2296356.html

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