Behind PM Modi’s GST pep talk in Mann Ki Baat lies his continuing dilemma on final consensus

In his monthly radio programme Mann Ki Baat, Prime Minister Narendra Modi once again credited all political parties for the passage of the historic amendment of Goods and Services Tax (GST) in Parliament’s Monsoon session. The PM cited  this as an example of bitter rivals coming together for a common cause in larger national interest.

From dismissing opposition’s protests on GST issue outright in the beginning as mere ‘obstructionism’ to a clear consensus path and giving credit to all, the BJP top brass’ change in approach is well-explained considering the massive process that follow and the need for close involvement of all parties at every stage in the run up to the April, 2017 GST rollout deadline.

One should see PM’s repeat appreciation of opposition parties on GST passage in this context. GST is a landmark indirect tax reform in the country that’ll subsume several different state-level levies into a uniform rate.  These taxes include central sales tax, value added tax and octroi. What next for GST rollout?

According to a report in the Times of India, half of the states are likely to ratify the amendment in their respective assemblies by September. This also includes the non-NDA states such as Kerala. Several states have convened special sessions to push the GST amendment. Maharashtra, which is among the states expected to suffer big revenue loss in the GST regime (Octori alone the state earns around Rs 8,000 crore per annum), will convene its assembly today to ratify the amendment. Tamil Nadu is yet to come on board.

In the meantime, the decision of the West Bengal government to drop the GST ratification earlier scheduled for Monday has triggered speculation  on a face-off between Modi and Mamata Banerjee, which might further delay the process. Since the beginning, Mamata’s TMC has supported GST. Half of the 29 states need to ratify the constitutional amendment. Such quick response from the states is heartening to see but not a surprise since majority states already had given in-principle nod to the idea of GST amendment. But, the real challenge lies in deciding the final standard GST rate.

This is where the centre stands between a rock and a hard place.

Most states have already pitched for an above 20 percent GST standard rate arguing that a rate too low, say 16 percent, will not be an agreeable proposition for them. This is despite the government promising full compensation to states for initial five years.  The political side of it is the Congress’ insistence on the 18 percent rate—something the party has highlighted at the very beginning of GST discussions in the Upper House as a precondition to agreeing to pass the historic amendment. How Modi and his Finance Minister Arun Jaitley (who played a major role in the GST consensus building exercise) will deal with the rate issue is crucial besides pep talk on radio.

Once the constitutional amendment is ratified by states, the proposed GST council that’ll be formed subsequently will have a hard task to solve the rate puzzle. Similarly, the issue of tax jurisdiction between the centre and states and the issue of right to tax by producing states Vs consumer states too will come up for debates before the council.  Also, the supporting legislations—state GST and integrated GST—needs to be passed by Parliament.

Considering all this, the April, 2017 roll out date will be a tough deadline for the government to meet. Most likely, the final GST rate structure will not show a single rate but a three-rate structure as proposed by the panel headed by chief economic advisor (CEA) Arvind Subramanian.  The CEA panel had proposed a concessional rate of 12 percent for public goods that concerns the deprived or weaker sections, a standard rate of 17-18 percent that would concern majority of items and a rate of 40 percent for luxury items and tobacco, aerated drinks and pan masala etc.

It is interesting to see how the Congress party will position itself on the issue of GST rate in the winter session of the House. If the Congress insists on the figure of 18 per cent, then the GST final rollout will be a painful, time-consuming affair to the Narendra Modi government.  Pacifying the Congress party agreeing to a lower rate will be a turn off for the state governments.

Presently, the weighted average of the central and state level taxes, in many cases comes around 28-30 percent. Of that, about 80 percent of goods attract 12.5 percent of central excise duty while at the state level 55 percent of items are charged with 14.5 percent VAT or sales tax. Thus, the weighted average of the two in 65 percent of the items comes to 27 percent. Now, add state cess, Octroi and entry tax takes, the final figure goes to 30 percent.

In this backdrop, states have a clear reason why they wouldn’t settle for a lower rate. Thus, the problem of rates can be resolved only if Congress relaxes its stand. Strong consensus from all parties, mainly the Congress, is required at every stage of the roll out. That is what precisely the PM is doing by appeasing the opposition parties and not claiming the GST trophy alone.