GST: Needed Cautious optimism

By Prof. R Vaidyanathan on 5 August 2016

GST: 24 steps to cautious optimism

After much suspense the Goods and Services Tax Bill has been passed by the Rajya Sabha with some amendments. The Congress wanted 18% as ceiling and the final Bill as a finance bill, both of which were not accepted by the NDA Government. But 1% interstate tax was removed and the Centre shall provide for compensation to the States for any loss due to the new tax for five years.


Essentially this GST subsumes earlier excise duty /service tax /entry tax, etc. Potable alcohol is excluded and petroleum products will be brought in after consensus in the GST council.


So what will a one nation, one tax GST regime mean?


  1. Kindly note you will continue to pay your Road tax to local RTO/property tax to local municipal bodies and land/house registration tax, etc as in the past—including regular “Chai/Pani Baksish”. The womb to tomb briberies will continue and so be relaxed—more so if you are a Government “servant”.
  2. Kindly remember that GST is levied on consumption and not on production.


Now the most difficult tasks are ahead of Centre. They are


  1. Get it passed in the Lok Sabha since amendments have been made by the Rajya Sabha.This may be easy given the BJP’s majority in the Lok Sabha.
  2. Get Presidential assent and get more than 50% of States to approve it. That is 15 States.
  3. If someone files a writ in the Supreme Court that GST is against the “Basic Structure” of the Constitution since it impacts on the federal arrangements, then the issue gets complicated. Remember that the AIADMK walked out of the Rajya Sabha on this issue.


If there is no petition and the judiciary does not create any road,blocks then the issues are:


  1. For the GST Council (consisting of all State Finance Ministers and the Union Finance Minister) to decide what is the revenue neutral rate or RNR—which is essentially that rate which would not affect the revenue of States.
  2. This is tricky since currently the average rate for services is around 15% and for manufacturing around 20% and major manufacturing States like Tamil Nadu and Gujarat are worried about its impact and major consuming States like say Uttar Pradesh and West Bengal are concerned about end product prices. Cities like Mumbai are concerned about loss of octroi and impact on Mumbai Municipal Council.
  3. Each State will have one vote — this is peculiar since some are major States and some are tiny. This not a logical way of dealing with complex tax issues.
  4. As of now the rate suggested by the Centre seems to be 18% and that means luxury goods will entail larger rates and wage goods used by common man may be taxed around 18%
  5. Many States are not happy with 18% and they would prefer a much higher rate.
  6. The higher the rates, the lesser will be compliance since it will not benefit to induce traders to accede to higher rates.
  7. Actually lower the rates, the larger will be collection and the tax base /coverage will become big. From that point loss of revenue to states will not be there.
  8. We feel a rate of 12% to 14% will dramatically alter the scenario of tax evasion and significantly increase tax compliance and tax coverage and keep it at say 16-18%for luxury goods.
  9. But our netas can be short-sighted and fix the rate very high, say 24% or 26 % and kill the goose which may lay golden eggs.
  10. It is important to realise that coverage and an enlarged base will bring larger revenues on a sustainable basis.
  11. We estimate that around two-thirds of our economy is service sector and more than 70% dealers will be traders.
  12. States are demanding that trades less than Rs 1.5 crore should be exclusively covered by them. The Central Board of Excise and Customs are not in favour of it, fearing complete loss of control on majority traders.
  13. I feel traders with less than Rs 5 crore turnover can be left in “peace” (exempted) under this tax regime – currently revenue of Rs 10 lakh is considered for exemption.
  14. Assuming that the entire exercise is completed by March 2017— including IT infrastructure, etc, then initially inflation will go up since service sector will be impacted and will increase prices.
  15. Manufacturing or goods sector will get benefit due to reduced cost of logistics/no tax on tax, etc, but may not pass on the benefit to customers.
  16. It might take some years before the full benefits reaches the consumers.
  17. From the Government’s point of view the benefits should be felt before the Lok Sabha election of 2019.
  18. In India many a time we plan to create a Ganesha idol with all details and good intentions, but what is called “implementation” or “last mile”, we tend to have a Hanuman idol.
  19. Hence cautious optimism is needed.

The writer is Professor of Finance at IIM, Bangalore. Views are personal.


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