GST clears a hurdle, but tougher challenges await

Last Friday, the verbal slug fest between the Bharatiya Janata Party (BJP) and the Congress, both in the run-up to and after the GST Council meeting in Guwahati, all but hijacked the narrative. For any lay person, listening in on this political grandstanding, it would seem as though the entire meeting was about the slashing of GST rates for over 200 items and as to which of the two parties deserve the credit—understandable since the Congress has made GST, especially the glitches in its implementation, a central issue in its campaign for the Gujarat elections.
Indeed the facts of the matter, as always, are otherwise. More importantly, the political differences didn’t derail the day-long deliberations. Actually, it almost did, when tempers frayed over some of the social media messages put out by some Congress politicians. But insiders reveal that finance minister Arun Jaitley intervened and appealed for calm, saying, “Politics outside (the room) is fine, but not inside.” Mercifully, wisdom prevailed and the 23rd GST Council meeting successfully preserved its unblemished consensus record.
Nonetheless, the meeting provided clear signals not only to the future direction and shape of the GST but also the challenges, which if unaddressed could undermine India’s marquee piece of tax reform, which has for the first time economically unified the country and unambiguously signalled its commitment to transition to a rules-based regime.
First, the plumbing has to be further fine tuned, particularly the software support being provide by the Goods and Services Tax Network (GSTN). As insiders reveal, it has been the biggest disappointment since GST was rolled out on 1 July, forcing the Council to make undesirable stop-gap compromises in design. A group headed by Bihar’s finance minister Sushil Modi is overseeing this and working with the vendor. Presumably an end is in sight.
Second, the massive reordering of GST rates undertaken in the Guwahati meeting clearly signals that a convergence of rates is underway. Contrary to erroneous claims made in some quarters of a single rate- GST based on arguments that multiple slabs were leading to chaos, it is clear that eventually (if not sooner) there will be three slabs. Haseeb Drabu, finance minister of Jammu and Kashmir, lent official confirmation, as it were, in a rare two tweets: “Till 4 months back 100s of tax rates, slabs, brackets & exemptions were ok. Now 5 rates are chaotic!”
And then followed up with another: “What 5 rates. Merit, standard & demerit rate is the norm. So all there is to it is collapsing 12 & 18% . Will converge overtime.”
Third, the GST Council has to, at the earliest, address two issues that threaten to undermine the architecture of this indirect tax reform.
It should restore the Reverse Charge Mechanism (RCM), wherein large entities were paid the taxes on behalf of unregistered SMEs on goods purchased from them. The entire idea was to widen the tax base and at the same time accelerate the formalisation of the informal economy. These objectives are being defeated by any delay in restoring the RCM.
Similarly, the implementation of the e-way bill facilitating seamless inter-state transport of goods should be fast-tracked. It was designed to eliminate state-wise documentation, speed up transit of goods, discourage corruption and expedite formalisation of the country’s logistics network. But given the glitches in the GSTN, it was wisely decided to defer its rollout. Now there is a lobby underway to put it on permanent hold.
Fourth, and finally, the GST Council has to figure out a way to ease the burden of compliance for the small and medium enterprises (SMEs). Indira Rajaraman has argued this point very eloquently in a column published in Mint. Like she points out unless the systematic bias against small-scale dealers embedded in the existing GST design are not fixed it risks harming the supply chain structures and undermining the very logic of this tax reform and harming the economy. Since almost everyone in the GST Council is a politician the members must be acutely aware that the consequences of not coming up with a speedy solution can be electorally challenging—especially for incumbent regimes.
The systematic bias against small-scale dealers embedded in its present design is harming supply chain structures and must be remedied.
In the final analysis it is clear that the GST experiment, despite initial setbacks, is off to a good start. It is undoubtedly a work in progress. At the same time, it would be foolish to ignore the threats to it from an outdated regime. Presumably the GST Council realises that good economics can also mean good politics.