Dr. Bhalchandra Mungekar, an economist and Congress RajyaSabha MP, was on the Rajya Sabha’s Select Committee on the Goods and Services Tax. He is possibly best placed to explain the reservations the Congress has with the BJP’s GST Bill, and face questions on the same. So Rishi Majumder speaks to him for this exclusive interview. Excerpts:
What were the key impediments the UPA faced while trying to get the GST bill through?
When the bill was introduced, some of the provisions were vehemently opposed by BJP ruled states. The present Prime Minister, Narendra Modi, who was then Gujarat Chief Minister, was opposed to the bill. We tried our level best to bring them to the board on some of these provisions which we had built into the bill – which were unacceptable to them – but they refused. Then, when UPA went out of power, they brought the bill to parliament and we objected precisely to some of the conditions which they were objecting to in the bill. I don’t think it is desirable to give any kind of political colour, either from our or their side. It was basically a tug-of-war from their side. In a sense the GST bill is revolutionary. The BJP may not have been wanting that a Congress-led Government get full credit for making such a fundamental change in the taxation system of the country.
How is the GST bill today different from what the UPA had proposed?
That is the substance of the issue and the reason why the Prime Minister called Soniaji Gandhi and the former Prime Minister Manmohan Singh for discussion. I would have been extremely happy had the Prime Minister called such a reconciliation meeting much earlier and, also, I would have been very happy had he had called, along with the Congress party, other opposition parties. The Congress has more members than any other political party in the Rajya Sabha. But then, I think it is necessary for the ruling party and personally Narendra Modi to take all political parties on board.
What are the provisions we want in the bill? The provisions they omitted, we want them back. The first is, we want a cap of around 18 percent. In the developed countries, all European countries, GST ranges from 7.5-8 percent to around 11-12 percent.
Even 18 percent, which will be six or seven percent higher than European countries. Still there will be some variation because of transport fees etc. Now Government says it will not be possible to introduce a particular rate as cap, because then we will have to keep amending the constitution when we want to change the cap. Now the Indian Constitution was amended within just more than a year after 26thJanuary, 1950, for the land reform legislation. Therefore that, according to me, is not the issue. Once you put 18 percent, you are not revising immediately within a year...
The second point is we are opposed to one percent additional tax to be imposed by the manufacturing states. Because despite GST being a destination and consumption based tax, the manufacturing States will get this benefit, and poorer States, who are less advantaged, less developed, less industrialised States, will have to pay a higher price. Already there is tremendous imbalance in the regional development, and this kind of additional one percent tax by the manufacturing states will further accentuate this. Also, this one percent tax will have a cascading effect. At every point of time there will be some follow up tax, and, one percent tax will eventually result in becoming a 4 to 5% tax. In that sense, even if we cap the tax at 18 percent, with the total cascading effect of the one percent additional tax the GST will be around 22 to 23 percent, which is not acceptable to us.
Thirdly, we had provided in the bill for a GST Disputes Settlement Authority, which according to us should be an independent body, comprising of a Chairman – whom we suggested could be a retired Chief Justice of the Supreme Court or a retired Chief Justice of the High Court – and two prominent persons, from among economists, from industry, from the taxation structure, from the corporate sector, or likewise. But they are giving the right of dispute settlement to the GST Council themselves. The GST Council, under the present bill which they brought, comprises only the Central Government and State Government representatives. Now the disputes with regard to the GST will be between the Central Government and the State Governments or between the State Governments. So this means that the parties themselves will be comprising the GST Council, and they themselves will be giving the verdict, which is less likely to be impartial.
The fourth thing is that they suggest 100 percent of compensation for the revenue losing states will be given for the first two years, 75 percent for the third year and 50 percent for the last two years. Now, GST and withdrawal of other taxes will be having a differential impact on different states. The Congress party wants that 100 percent compensation for the revenue lost should be paid to the revenue losing States for not less than five years.
The fifth demand is a permanent creation of a GST Compensation Fund so that there isn’t any kind of adverse-ism or unforeseen consequences due to which State Governments lose their compensation.
What is the mechanism for deciding on this period for compensation?
When they suggested ‘100 percent for the first two years, 75 percent for the third year… ’, on what basis did they decide it? Can we estimate exactly what will happen in the first year? Our position is to take into account policy implementation and the time lag. Policy will seldom give you results from day one. For example, the Government says that, if we pass the bill in this session, from 1st April 2016 the bill will be implemented. I doubt it because it will require a tremendous amount of infrastructure, information, logistics – technical knowledge and equipment. Our flat argument is that, irrespective of any standard academic criterion, at least for five years the State should be having compensation for revenue loss. Now, if, suppose, in the fourth year itself, a State has acquired resources to get on par with revenue lost, then in the fifth year they won’t be getting compensation.
There is also a disagreement over the Centre comprising three-fourth of the GST Council, whereas the Congress would like it to comprise one-fourth…
That is subject to negotiation. It may be that the Centre will be one-third and the States two-third or a 50-50 formula. This could be sorted out. Also, as I had mentioned, they are saying that the GST Council itself will be acting as the disputes settlement authority, which we don’t want and will insist on.
On the dispute settlement authority, Finance Minister Mr. Arun Jaitley seems to have a problem with Congress asking for a forum where “judges” will decide issues…
Why does he have so much contempt for the judges? Practically, if you go into a commission of enquiry appointed after, say, communal riots… this is not a judicial process, but judges or ex-judges are often appointed as Chairpersons of such authorities. I do not want to be too harsh towards Mr Jaitley, but whenever a question of judiciary comes up I find him to be uncomfortable. I don’t find any intrinsic reason for him to be so in this case. We are asking for two experts and a former Supreme Court or High Court judge. Even if the ex-judge is given a casting vote it is still two is to one. I think we should attribute enough wisdom on a judge to not oppose two experts if they have a unanimous vote.
On the cap of 18 percent, why should it be in the Constitution? It is not so in other countries. Could it not simply be a part of legislation which can be amended by an act of Parliament?
If we are going for such a major structural change, it is better not to be fearful of a bogey of constitutional amendment. On what basis are they proposing a one percent additional tax for manufacturing States in the Constitution?
But you’re opposing that anyway…
But we are discussing the principle. The principle is whether there should be such a provision in just a parliamentary legislation, instead of the Constitution. What I am asking is: What about the sanctity of that one percent then?
But why can’t both be removed?
That we’ll be discussing.
The GST rate will be decided by the RNR (Revenue Neutral Rate, simply explains, this is the rate at which no revenue is lost, despite the change in the taxation system). Even while the RNR was still being calculated by Chief Economic Adviser Dr Arvind Subramanian’s team, a cap was proposed. Shouldn’t you have waited?
See, in all probability, going by the way Government and economy functions, the 18 percent cap need not be removed within the first year. And after one or two years, the States will have stakes in deciding whether 18 percent is too high or low for them. And the States will be mature enough to decide that. So let us leave it to the States. Since a constitutional amendment will be required to change the cap on the tax, two-thirds of the States will have to be on board. States will definitely come together if this is necessary, and it will be easier to pass such an amendment than it was to pass the GST bill itself as States know their interests best. Knowing self-interest or protecting self interest is the basic function of economics!