Home >Politics >News >GST changes for benefit of small taxpayers, not for political gains: Sushil Modi

NEW DELHI : Veteran Bharatiya Janata Party (BJP) leader and Bihar deputy chief minister Sushil Kumar Modi has been deeply involved in the reform of indirect taxes. He had previously led the empowered committee of state finance ministers, the predecessor to Goods and Services Tax (GST) Council, when India tried to build consensus among states to pool their sovereignty in taxation so that Asia’s third largest economy could have uniform indirect tax across the country. The GST Council often turns to Modi, who has his ear to the ground and knows the pulse of state finance ministers across the political spectrum, to resolve contentious tax issues. With national elections around the corner, the Council is making several changes to GST to give relief to sections of taxpayers. Are these helping or undermining the largest tax reform since independence? Edited excerpts from an interview:

The GST Council’s latest move to let states set a sales threshold of their choice, 20 lakh or 40 lakh, for businesses to register for GST will make taxation more complex. Will it not?

Most of the states wanted 50 lakh threshold for GST registration as it is kept higher everywhere else in the world. Even at the time GST’s design was discussed, there was a proposal for keeping it at 40 lakh. Although many states wanted it to be reset at 50 lakh, after discussions, the Council decided for 40 lakh. There is hardly any difference between 40 lakh and 50 lakh as barely one lakh more dealers would have been excluded from registration with meagre revenue impact. But surprisingly, Chhattisgarh opposed raising the turnover threshold for registration tooth and nail. The state wanted it unchanged at 20 lakh. Even Congress-ruled states like Karnataka and Punjab, which were not willing to raise the threshold earlier, finally agreed for 40 lakh. Only Kerala and Chhattisgarh are the two states that insisted on keeping it at 20 lakh. (Kerala is recovering from the worst floods in a century that washed away roads, crops and cattle and submerged large parts of the state last year.) GST Council chairman and Union finance minister Arun Jaitley said that having two registration thresholds was not desirable, although some special category states have a different ( 10 lakh) threshold. But these (two) states insisted. However, Arun Jaitley did not want a voting on the issue as all issues have so far been resolved by consensus. Ultimately, we decided for having two turnover thresholds, but I personally feel there will be pressure from local dealers in states that keep it at 20 lakh to raise it to 40 lakh. These changes in the tax system should not be viewed from the angle of politics. These are for the benefit of small taxpayers that contribute meagre revenue to the exchequer but face high compliance burden. We can understand Kerala’s position as it has always been against tax concessions in GST. But many state ministers speak outside the Council favouring tax rationalization, but oppose such moves in the Council.

Will raising the sales threshold for registration not affect the formalization of economy (defined as economic activity being accounted for in the tax or social security database), which is one of the biggest gains from GST?

Even after keeping the registration threshold at 40 lakh, more than half will not opt out because they want to be in the tax credit chain. Many are doing inter-state business, which require registration irrespective of sales. Also, big dealers will prefer to purchase from GST-registered entities, encouraging smaller ones to remain registered. Only very small dealers may opt out of registration. Besides, the tax administration can focus on large traders rather than small ones. During pre-GST era, entities up to 1.5 crore were exempted from excise duty, the tax on production. When excise was subsumed into GST with a 20 lakh registration threshold, small businesses faced difficulties. Keeping that in mind, the Council opted for a higher threshold.

There has been many rounds of GST rate cuts despite tax revenue lagging behind targets. With many traders going out of the tax net, the burden on the Union government to make up for states’ revenue shortfall will increase, will it not?

It is not that till we achieve the revenue target, we will not reduce tax rates. Rate rationalization is an ongoing process and revenue impact of tax cuts on many items is very less. We lowered the rate on items that made people feel the pinch. We have been rationalizing the rates and at the same time trying our best to achieve the revenue target. A committee has now been formed to look into why revenue shortfall position is not good in the case of some states.

For the opposition Congress party, GST is an election issue and party leaders say a GST revamp will be on the agenda if it comes to power.

So far, they have not suggested anything to that effect in the GST Council. In the Council, no party can do anything on its own. Besides 16 BJP-ruled states, those ruled by the Congress, CPM (Communist Party of India-Marxist) and Trinamool Congress are represented in the Council, each having their own issues and problems. Till now, Congress has not suggested any radical idea about what they want to do. So Rahul Gandhi should announce what kind of revamp they want. So far, Congress party-ruled states have also agreed to all decisions taken in the Council and there is nothing they have suggested that has not been discussed and decided upon. It is very easy to claim a revamp is needed. Is there any state that is ready for a single GST rate? One should ask Congress-ruled states whether they are ready for single GST rate. When they (Congress-led United Progressive Alliance) had an opportunity, they could not implement GST. Also, compensation was denied to states on central sales tax (CST) reduction. The current Union government ensured that it will compensate states’ revenue shortfall and every state agreed to implementing GST. If Congress has new ideas on reforming GST, they should bring it at the next Council meeting.

Is politics increasingly influencing GST-related decisions?

I do not think politics will influence decision-making. Even Congress party ministers are very reasonable. They may say something outside the meeting, and sometimes in the meeting too, but decision-making is by consensus.

One criticism about GST is the frequent changes in GST rules that give the impression that the reform is still to stabilize.

What is wrong in frequent changes in a vast country like ours? Nowhere in the world, there is one law, one set of rules and procedures and one tax in a country as big and diverse as India. Naturally, when we approach a new taxation, it is very difficult to visualize all scenarios. So, we bring changes for the betterment of GST instead of shying away from it. It is in the interest of the consumer, the taxpayer and the government that the Council is sensitive to all. There is no harm in it.

One unfinished task of indirect tax reform is inclusion of petroleum products in GST. When could this happen?

It is for the Council to decide. It is going to be one of the major decisions and states will incur heavy losses. I do not think the time has come. We can think of bringing petroleum products into GST when we achieve the revenue target (of about 1 trillion a month for this fiscal).

GST has failed to deliver on an anticipated 1.5-2 percentage point surge in economic growth rate. Can you explain why?

Nobody has said such growth acceleration will be achieved in one year, or two. It will take time. The economy has formalized, indirect taxation has become transparent and revenue is growing. Eventually, the expected surge in growth rate will happen. It will also boost direct tax collections.

One worry of states is that businesses and traders are not passing on benefits of GST rate cuts fully to consumers.

In the last one year, the National Anti-profiteering Authority (NAA) has been very active. They have penalized big firms too. State administrations are also very active in flagging instances of profiteering.

Union government’s constitutionally-guaranteed compensation to states for GST revenue shortfall is for five years from the rollout of the reform in 2017. Do you think there is a need for compensating states beyond 2022?

I am confident that after 2022, no state will require any compensation. During introduction of value-added tax (in 2005), compensation was planned for three years, but every state was happy after two years. But still, if the Council feels compensation needs to continue for another few years, it can make that recommendation. We can amend the Constitution. The GST compensation cess (through which the centre finances compensation to states) is already there. This is only the second year and it is too early to comment on this. I am confident most of the states will not need compensation after the third year.

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