Home/ Opinion / The GST at last, but much still to be done

The passage of the constitution amendment bill that clears the way for a complete overhaul of the tangled Indian indirect tax system is welcome. P. Chidambaram was finance minister when he said way back in his 2006 budget speech that there was a broad political consensus to replace the confusing array of levies with a nationwide goods and services tax (GST). That it has taken a decade for the broad consensus to actually translate into legislative approval tells us a lot about the political gridlock that has held back essential reforms in recent years.

The display on the electronic voting machines at the end of the voting in the Rajya Sabha was pleasing, with not a single vote against the bill. Such overwhelming political agreement is rare, though one political party walked out. The Narendra Modi government—and especially finance minister Arun Jaitley—did well to bring other political parties on board. The Congress party too has shown sagacity in not blocking a change that it worked so hard for when it was in power. Its suggestions on the structure of the GST were sensible, though this newspaper does not agree with its demand to write the tax rate into the Constitution.

A lot of hard work remains to be done. The actual shift to the new tax may take more time than expected, so meeting the April 2017 deadline seems like a stretch right now. The constitution amendment bill needs to be cleared by legislators in at least half the states by a two-thirds majority. A GST Council has to be set up. Then the actual GST Bill will have to be drafted, and later get ratified by Parliament and legislative assemblies. The rate at which the tax is to be levied has still not been decided. The back-end technology infrastructure needs to be tested, as some states already have. Meanwhile, companies have to get their own internal processes in place so that they can adjust to the new tax system. We doubt most smaller companies are ready for the shift.

Finalizing the tax rate is a critical task. There is a compelling reason to keep the GST rate as low as possible without hurting government revenues across the federal architecture. Like all indirect taxes, the GST too is regressive. It is levied at a flat rate on all consumers, irrespective of their income. One of the goals of a good tax system is to depend less on such regressive taxes. So, the GST rate should be kept low.

Of course, some of the immediate problem of regressivity will be ironed out since the prices of goods are likely to come down while the prices of services are likely to go up. The consumption baskets of the poor are skewed towards goods rather than services. So, there will be an initial positive redistributive effect as the new tax system kicks in.

Do not be surprised if the current GST euphoria wanes as some inevitable teething problems emerge. For example, an increase in restaurant bills can provide useful fodder for those in the business of creating temporary excitement. But it is important to see past such niggling problems during the coming transition, and understand that the GST can provide immense economic advantages to India.

An integrated national market will create economic efficiency in the sense that Adam Smith wrote about a few centuries ago. Supply chains will be streamlined. Smooth movement of trucks across state borders will reduce the need to maintain large piles of inventory. Small companies will become more competitive. Tax evasion will come down as companies will need bills to claim tax credits. The ease of doing business will improve.

The GST seems to be on its way to finally becoming a reality. It is now time for the Modi government to shift its focus to overdue direct tax reform—which the United Progressive Alliance abandoned after some initial enthusiasm. There is a good framework in the proposed new direct tax code. Jaitley should get cracking on it.

Should political parties have cooperated more on the GST? Tell us at views@livemint.com

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Updated: 05 Aug 2016, 01:36 AM IST
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