Last week, the debate on the country’s proposed move to shift to a goods and services tax (GST) regime took a fresh turn after the 13th Finance Commission joined it. The submission of its task force report was the first real empirical effort and will force, if they are honest with themselves, at least two of the stakeholders, the Union government and the states, to refresh or recast their existing positions.
At the moment, both are placed at opposite ends of the poles—the Centre batting for a single GST, while the states are pushing for a dual (made up of one high and another low rate) GST; and, there’s absolutely no movement on the rates. The deadline of 1 April has already become a casualty in this battle; expectations are that a GST roll-out may be by 1 April 2011.
With all attention focused on this battle of attrition, one has overlooked the point of view of two other key stakeholders—trade and industry on the one hand and consumers on the other. This is largely of their own doing. Trade and industry representatives have sought to play it safe and not take sides in the ongoing debate. Consumers, on the other hand, haven’t really got involved because of two reasons—the dense nature of the subject is intimidating and, at the same time, there is no national forum/body for consumers to express themselves through.
Also Read Anil Padmanabhan’s earlier columns
It is time for both stakeholders to get involved. To consumers, the single biggest benefit will be reduced prices—if they manage to prevail upon the Centre and states to accept a lower rate. But, this would depend on the ability of the Centre to prevail with its idea of a single rate—to be attractive it has to be low; akin to the flat rate of 12% recommended by the 13th Finance Commission task force.
To industry, it has even deeper implications. At present, the country is ruled by a myriad set of tax rates. At one level, you have what is imposed by the Centre and, at another, there are those effected differentially by states. The effective tax rate, according to public finance experts, comes out to around 28%—at least double of what has been recommended by the 13th Finance Commission. The commission estimates that even a 2% reduction in costs can enhance profits by 20%.
GST would mean moving to a uniform tax regime across the country. Which, as this column has explained earlier, is the political economy of the tax reform effort (along with the implementation of the direct tax code, it will be the culmination of the effort initiated by the Long Term Fiscal Policy of 1985). It is as much about reforms as it is about future revenue—at present the focus of the entire debate among the two principal stakeholders has revolved around revenue considerations.
A low rate would imply lower compliance costs and correspondingly less harassment for industrial units and service providers. More importantly, however, as a seminal report prepared by the National Council of Applied Economic Research (NCAER) for the 13th Finance Commission (posted on its website) reveals, a single GST would lead to additional gains in the gross domestic product by as much as 1.6%. Implicit in this are productivity gains to the economy. The NCAER study, based on data from around 2 million business entities for the year 2007-08, estimates that there would be almost a doubling of real returns on land and capital and the wage rate. The importance of these numbers are not in the forecast they make but instead the direction that they set out.
Alongside, as the study reveals, the GST regime will provide a level playing field to Indian industry. At the moment, while the central tax levies are compensated through the duty drawback regime, this is not true for most of the state levies. At the same time, competing imports do not have to absorb state levies.
This should seriously concern domestic industry, not only because customs tariffs have come down rapidly but also because the government is stepping up the pace on free trade agreements (FTAs). Beginning 2004, the country has inked four FTAs—including one with the Association of Southeast Asian Nations (Asean) earlier this year; FTAs now cover nearly 20 trading partners. A quick back-of-the-envelope calculation reveals that on an average a little less than one-fifth of the country’s imports accrue from these countries. Looking ahead, a level playing field would, therefore, be the bare minimum for domestic industry as the government inks more FTAs and lowers trade barriers further.
What the 13th Finance Commission study does is to lay down these ground realities. At the same time, it provides an empirical reassurance to the Centre and states that a low uniform rate would not cause revenue losses. To allow for the fear of the unknown, it has even recommended the creation of a compensation fund.
With this, the stage is set for a debate among all stakeholders and not just between the Centre and states. And no rhetoric please!
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comment at firstname.lastname@example.org