GST can only help common man if government can implement it

It was first proposed as a tax reform proposal in 2004.

 |  4-minute read |   22-05-2017
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The process and politics of accepting the Goods and Services Tax (GST) Bill is perhaps rewriting some of the practices of parliamentary democracy in the country. India is witnessing a unity among political parties on GST; however it is silent on some core aspects of the Bill.

Every political party in the country is responsible for the merits and demerits of GST. It was first proposed as a tax reform proposal in 2004, along with the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

These two are well integrated proposals of the state government to regulate public spending. The FRBM Act proposed a cap on state investment and GST institutionalised the limitations of state funding. The FRBM Act aims to reduce state and central government spending, including deficit finance. It fixed the fiscal deficit at 0.3 per cent of GDP and revenue deficit at 0.5 per cent of GDP. It left the state government to rely only on tax income to meet expenses.

Though belonging to the Left Democratic Front, the finance minister of Kerala referred to this as a reason to support GST. The parliamentary Left parties’ political differences with the BJP do not impinge on building solidarity on GST implementation.

FRBM 2003 was an infringement on fiscal federalism in terms of financial autonomy. It is a fact that the Act put pressure on state governments to raise tax income to meet revenue expenditure. So a comprehensive and unified tax structure is inevitable for the country.

The GST Bill offers a uniform tax structure which in fact enables the state and central government to monitor the tax structure. It proposes large scale tax reforms to ensure government income and the major promise of GST is the sharing of benefits of input tax reduction with the common man.

In principle, the GST is a commitment by the central government on fiscal federalism. In the initial five years the central government has to compensate the tax loss of state governments.

The reports on implementation of GST do not provide much hope to the common man. The first and foremost is the threat of price rise of essential commodities. As per media reports, the finance minister has warned companies against arbitrary price rise.

retail-embed_052217121111.jpgIndia’s experiment with fighting inflation proved that the government could not intervene in the supply side to check price rise. Photo: Reuters

It is a rare event in a country like India. The warning is primarily on assessing input tax. But it is a reality that the price of certain essential commodities will rise. Excluding luxury products, there would be an increase in the price of healthcare, rail service and rent.

A study conducted by the tax research unit, commercial tax department, Odisha, on essential mass consumption goods proved that there would be 5-6 per cent rise in essential food prices. 

Such rise in prices needs to be assessed in the context of market accessibility in the country. Indian inflation assessment already proved that once prices rise, they remain stable or convert to normal price.

Only supply side intervention is effective in the country to check the rise of prices, which is dependent on institutional support. India’s experiment with fighting inflation proved that the government could not intervene in the supply side to check price rise. This is the reason why the common man trusts the government and GST.

The common man’s hope on the GST is the low input tax proposed, which theoretically reduces prices. However, Indian companies' attempt to increase prices to avoid loss in profit is going to impede efforts. The finance minister’s warning is not going to change the business attitude of the companies.

It is again dependent on how effective the implementation of GST is. Section 171 of the GST Bill proposes to set up an anti-profiteering intervention. As per the Act, “Any reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. (2) The central government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in tax rate have actually resulted in a commensurate reduction in the price of goods or services or both supplied by him. (3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed."

Such an authority is yet to be constituted in the country. So it is going to be short term gain for producers. The true spirit of GST is dependent on the central government’s capability to implement the provisions of the Bill.

However, setting up an anti-profiteering agency is the least considered concern in the GST discussions. It is not a price regulating agency; instead it is a production-processing regulating agency.

Also read: How GST will change your life


S Mohammed Irshad S Mohammed Irshad

The writer is an Assistant Professor at Jamsetji Tata School of Disaster Studies, Tata Institute of Social Sciences, Mumbai.

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