DUAL control by State and Centre is bad as it will force businesses to deal with two bureaucracies and pay grease money twice. It is better that the State Commercial Tax Departments are disbanded and single-point control of the Centre is established since control of the Centre on larger accounts is inevitable.
Few economists, including myself, have opposed the GST in the past. The first reason for it was that GST was proposed to have a single rate of tax. The bicycle and the luxury car were to be taxed at the same rate. This provision has been thankfully modified. The proposed GST regime will have four rates of tax — 5%, 12%, 18% and 28%. Goods consumed by the common man will be taxed at 5% while luxury cars and tobacco will be taxed at 28%. The latter tax will also carry a cess of 12% making the effective rate at 40%. This modification is welcome. However, I do not see why a “cess” of 12% is imposed on these goods. It would be better to raise the slab of 28% to 40%. That said the original proposal of a single rate of tax for items consumed by the rich and the poor has been scrapped. This is welcome.
The categorisation of goods in the four slabs though is still pending. It is still to be decided whether bicycle will attract 5%, 12% or 18% GST. It is important that the categorisation is done transparently and in a pro-poor manner. The benefits of the different rates of GST for the common man will be undone if goods like the bicycle that are consumed by him are put in the 12% or 18% slab.
The second reason for opposing GST was that exemption to small businesses and industries was to be removed. This too has been modified. The limit for requiring a business to register (without having to pay tax) has been raised. The turnover that will be exempt from tax has also been increased. The small business, therefore, will not be adversely affected. This modification is welcome.
The third reason for opposing GST was the end of fiscal autonomy of the states. At present every state has the authority to adjust the rates of sales tax according to its circumstances. One state may impose a sales tax of 10 percent on TVs while another may impose 20%. The states will lose the power to adjust these rates under the GST regime, except for petroleum. This problem remains. However, we may welcome GST in view of the two earlier problems having been addressed.
One issue that remains to be solved is that of control over tax collection. States are demanding dual control. They want that assessments below a threshold limit of turnover of, say, Rs 1.5 crore per year should be made by the State Commercial Tax Departments. The Centre could scrutinise some of these assessments. Assessments above this limit may be made by the Centre. The Joint Action Council of State Commercial Tax Department Officers has threatened to go on strike if this demand is not met. The motivation, of course, is to not let the hen laying the golden egg go away from their hands. Officials of the State Commercial Tax Department will lose their incomes from corruption if the assessment is done by the Central Government officials. As far as the people are concerned, there is very little to choose between the two equally corrupt departments of the State and the Centre. Gopal Krishna of Citizens Forum for Civil Liberties points out that there is a revolving door system between the states and the Centre. Officials of the state go on deputation to the Centre. How they will become “honest” when posted at the Centre if they were corrupt in their home states, they ask. The call for agitation given by the Joint Action Council of State Commercial Tax Department Officers, therefore, is aimed more at protecting their sources of corruption.
Dual control by State and Centre is bad for another reason. It will force businesses to deal with two bureaucracies and pay grease money twice. It is better that the State Commercial Tax Departments are disbanded and single-point control of the Centre is established since control of the Centre on larger accounts is inevitable. The states should ask for the power to scrutinise the working of the tax officials of the Centre and even a say in the appellate mechanism. This could provide some relief to the people. The harassed taxpayer may get a more positive response from the state government officials who will primarily be disposed against the Central government officials.
An issue raised by Tamil Nadu is that of equal weight to the vote of the states in the GST Council. As per the present draft, Manipur and Maharashtra will both have one vote. This is like giving them equal number of MPs in the Lok Sabha. Value of the vote in the GST Council should be proportional to the population of the state, I think.
Another contentious issue is that of the veto power provided to the Centre in the GST Council. The present proposal provides 33% vote in the GST council to the Centre. All the states combined hold votes of 67%. At the same time, 75% votes are required for a proposal to be adopted. This means that the Centre can put the spanners in the adoption of any proposal because all the states together cannot garner the required 75% votes. There is no need to give even 1% vote to the Centre. The role of the Centre should be to implement the mandate given by the states.
Overall then, GST is good though five points need attention. One, the 12% cess should be merged into the 28% slab for demerit goods, and the scope of these demerit goods should be expanded to fast foods and other unhealthy or undesirable goods. Two, items of consumption by the common man should be rigorously placed in the 5% slab. Three, State Commercial Tax Departments should be disbanded and a single-point control by the Centre should be adopted. State Governments should be given the right to scrutinise the working of the Central government officials. Four, the voting power of the states should be proportional to the population. Five, there should be no vote for the Centre. GST will indeed become a positive development with these provisions in place.
The author was formerly Professor of Economics at IIM Bangalore