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Demonetisation stymied GST roll-out by April 2017

By Biswajit Choudhury | PUBLISHED: 03, Jan 2017, 18:18 pm IST | UPDATED: 04, Jan 2017, 14:34 pm IST

Demonetisation stymied GST roll-out by April 2017 New Delhi: The year was supposed to be that of final preparations for rolling out the comprehensive reform of India's indirect tax system through the Goods and Services Tax(GST), but progress towards meeting the government's implemention target of April 2017 was stymied by its November move to demonetise high-value currency.

Parliament's approval in August of the long-delayed GST constitution bill marked the realising of the dreams of the pre-Independence nationalist bourgeoisie of a pan-India market without barriers. It only remained to be rolled out and the government set the target date of the start of fiscal 2017-18 on April 1.

Thanking all parties for their support to the Bill, Prime Minister Narendra Modi said GST was "crucial" for ending tax terrorism, as well as reducing corruption and black money. The government had moved six official amendments to the bill, including one for scrapping one per cent additional tax, which were approved by Parliament.

The GST is a single indirect tax that proposes to subsume most central and state taxes like the Value Added Tax, service tax, central sales tax, excise duty, additional customs duty and special additional customs duty.

GST proposes to track all business transactions through the digital GST Network (GSTN) system, which should complement other measures to curb black money.

A GST Council of state finance ministers with Union Finance Minister Arun Jaitley as chair was formed after the passing of the Bill. Early in November, after various meetings, the Council finally agreed on a multi-layered rate structure as 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent, which is a departure from the general international practice of having one rate of tax for all goods and services.

The states are to be compensated by the Centre for revenue loss on account of GST for a period of five years from its implementation.

The base year to be taken for calculating state tax revenues is 2015-16, and states would continue to get compensation on the basis of the base year plus 14 per cent, which has been assumed as minimum annual growth of tax revenue.

The bill says the GST Council will make recommendations to the Centre and the states on issues such as taxes, cess and surcharges that might be subsumed in the GST tax rate.

The states will, however, be able to adopt a GST structure that is different from that recommended by the GST Council and the council recommendations will not be binding on the states.

Parliament and state assemblies have the right to accept those recommendations in their GST Bills.

India Inc has earlier represented to the Empowered Committee of State Finance Ministers on GST for an 18 per cent standard rate on the ground that this rate will generate adequate tax buoyancy without fuelling inflation.

Even after seven meetings of the GST Council, a deadlock continued between the Centre and the states on the vexed issue of "cross empowerment", or dual control of assessees. The question of who will exercise control over GST assessees -- the Centre or the states -- remains critical.

The states want exclusive control on businesses with turnover below Rs 1.5 crore (the current threshold for central excise), including the service taxpayers.

The next meeting of the GST Council has been slated for January 3-4.

Things appeared to be going as per plan before the November 8 announcement banning high-value currency to combat black money, counterfeit currency and terror financing that set off a major cash crunch and provoked vociferous opposition from political parties and the states, which pointed to the forthcoming huge loss of tax revenue on account of the depressive impact of demonetisation on economic activity.

Calling demonetisation "a big magnum-sized tsunami", West Bengal Finance Minister Amit Mitra earlier this month said India's GDP in the current fiscal will take a huge hit on its account.

Mitra, who is Chairman of the Empowered Committee of State Finance Ministers and member of the GST Council, also said that the postponement of the Goods and Services Tax regime could be an option to stabilise the economy badly hit due to demonetisation.

"Should we rethink of stabilising the economy from this big hit resulting from demonetisation and then go for GST? Do we take the risk of a second whammy at this stage?" he told a TV news channel.

Kerala Finance Minister Thomas Isaac said that implementing GST by the April 1, 2017, deadline appeared to be unlikely.

"Demonetisation has indeed vitiated the whole atmosphere," Isaac, who is a member of the GST Council, said, pointing to the washout of Parliament's winter session on account of the issue.

"Demonetisation is a big strike on the revenues of the states, and in Kerala, we are estimating our revenues to decline by 40 per cent from impact of demonetrisation," he said, adding that the Centre is being unneccessarily intransigent on the dual control issue.

Jaitley, however, clarified that there was no option but to implement GST next year.

"The government notified GST on September 16 and the constitution amendment itself says the current indirect tax system can continue for one year, after which the GST has to come. So, you have a constitutional compulsion to have a goods and services tax in place before September 16 (2017), otherwise the country doesn't run," Jaitley said at an event here earlier this month.