THE introduction of VAT in the mid 1990s robbed the states of much of its taxation powers and curtailed their fiscal autonomy. With the constitutional amendment and introduction of the GST what had been prevailing de facto has now been de jure abolished. Now states no more have independent powers for indirect taxation, except on alcohol and petrol. They are forced to abide by the decisions of the GST Council where no decisions can be made without the concurrence of the central government, not even if all the states take a united position. All decisions of the council require three fourths majority and the central government holds one third of the votes. The only saving grace is that the states have now access to service tax which was till now monopolised by the central government.

The constitutional amendment has only created the broad framework for the introduction of GST in the country. Within that constitutional framework it is still an open question whether we can have a GST which is more responsive to the concerns of the states and also the people. This is what the Left government in Kerala attempts to achieve with the cooperation of many of the state governments. So far the experience has been encouraging. The crucial decisions such as the rate structure, exemptions, actual implementation procedures, draft GST laws etc will be made in the coming months.

For example, take the case of GST rate’s structure. The debate so far has been about revenue neutral rates, whose estimates range between 12 to 24 percent. Generally the corporate, business circles and official experts have gravitated towards fewer and lower rates. The GST idealists would love to have a single low rate without exemptions to be imposed across the country. Now the report of the economic advisor Arvind Subramaniam, has chosen a two rate structure of 12 and 18 percent, with the higher rate for an outlier demerit good like tobacco. Remember that the Congress party wanted to have a constitutional amendment which caps the GST rate at 18 percent. It was argued that any higher rate would be inflationary and pose a burden on the people. But, a moment’s reflection is enough to see what a regressive taxation system the Congress’ proposal would have resulted in.

Currently, luxury SUVs suffer 34 percent central excise duty and 14.5 percent state VAT besides proportionate share of the service tax etc. Suppose there was a constitutional ceiling of 18 percent, the tax on SUV would have been reduced from 48.5 percent to a minimum of 18 percent. It would be a windfall gain to the manufacturers and dealers of SUVs and the top ten percent who are the major consumers. On the other hand, the textiles are generally tax free or suffer only a very low rate (2 percent in Kerala) besides the central excise of 12.5 percent. The tax burden on the textiles would rise to 18 percent as per Arvind Subramaniam. It beats one’s ingenuity to understand how tax on luxury goods like SUVs can be reduced by nearly 75 percent while the tax on common necessity like textiles would rise by nearly 25 percent. Remember, now many of the necessities like food and related items are tax exempted or taxed at a very low rate. If the present official approach is allowed to prevail, GST is going to result as one of the most regressive tax systems imaginable.

Therefore, Kerala is proposing a four tier rate structure for GST with 35-40 percent rate for luxury products, consumer durables and demerit goods like tobacco and fat goods. In contrast there must be a low rate of 4-6 percent for necessities of the poor like edible oil, sugar etc. Remember, the lower band for Aravind Subramaniam is 12 percent. There will be two intermediate rates of 12-14 percent and 18-20 percent as well. The latter would be the standard rate binding to a majority of the consumables and even raw material. Textiles may be included in the 12-14 percent tax rate. The indirect taxes can never be progressive, but, the GST in India must be made to be as less regressive as possible. But unfortunately, there has not been any serious discussion in the public domain, but for the Congress’ silly demand for a ceiling on 18 percent.

CONSCIOUS CHOICE

In the above paragraph we have referred to a narrow band structure instead of a single number rate structure. This indeed is a conscious choice. The central GST (CGST) and interstate GST (IGST) will have to be uniform throughout India. But, the state GST rate does not need to be so. The GST can permit greater fiscal maneuverability by permitting a narrow band to the states without endangering the GST regime. Besides, Kerala is arguing for a greater share for the states in the GST tax rate. Thus for example, a 20 percent intermediate rate can be translated into 12 percent SGST and 8 percent CGST. This difference would not have any significant impact on the overall performance of the GST regime. It would however provide an opportunity to correct the historical imbalance in the centre-state financial relations.

Almost all exemptions and tax concessions are going to be removed. The general principle that is being adopted is that if any area or sector has to be supported, it cannot be through the tax concession route, but, through direct budgetary support. What is the budgetary support that would be given for traditional industries like handloom and khadi when the tax exemptions are withdrawn? Currently, there is no excise tax on the small sector below the threshold of Rs 1.5 crore turnover. With GST this protection will be removed. All units above Rs 20 lakh turnover is within the tax net. What should be the demands to continue to provide the protection for small scale sector? I felt really depressed that even the national representatives of small scale manufacturers had not given a thought to this problem that they are going to face in the immediate future. 

There are very serious differences of opinion regarding the administrative machinery. There is an agreement that the central government would not directly deal with goods tax payers below the turnover of Rs 1.5 crores. But there is no such consensus with regard to the service sector. The central government is trying to grab the entire service sector including deemed goods like works contract, the composite tax payers who deal in both service and goods and even the new service entrants into the tax net. This is going to be a major issue of contention between the centre and the states.

The point I have been trying to drive home is that the support to the constitutional amendment does not imply submission to neo-liberal reforms. But, the engagement for protecting the interests of the states and the people in the GST regime is part of an ongoing struggle that has to be taken outside the parlance of the GST Council.