Former Finance Minister P. Chidambaram, the lead speaker from the Congress in the debate on the Goods and Services Tax (GST) in the Rajya Sabha last week, discusses why the Congress dropped its demand of a constitutional cap of 18 per cent on the standard GST rate, and how the provision on the dispute resolution mechanism may not pass the constitutional test. Excerpts from an interview:
Are you suggesting that the provision for the GST Council to set up a dispute resolution mechanism could be challenged in courts? What’s the constitutional provision on disputes and how is the proposed provision in conflict with it?
I am saying that the provision may not pass the constitutional test. Even if it passes, you cannot avoid a judicial review of the decision by a higher court. Articles 131, 226 and 227 — the Bill does not amend these articles. It cannot amend these articles. Therefore, when judicial review is inevitable, what kind of dispute resolution authority should you set up? In my opinion, the only dispute resolution authority that will pass muster is one that has the trappings of a judicial authority. It must have legally trained people. Which is why Mr. [Pranab] Mukherjee’s Bill suggested a dispute resolution authority chaired by a retired judge; they have not accepted that either. I believe they will set up a purely executive body. I think it is constitutionally suspect. I can’t say whether the provision will be struck down unless I see the final provision. The provision may pass constitutional muster. Nevertheless, the power of judicial review will still be there with the High Court and the Supreme Court. States think, or they have been persuaded to think, that they can resolve these disputes among themselves. It is only when an actual dispute arises between State A and State B, and one of them is dissatisfied with the verdict, they will begin to put on their thinking caps. The dissatisfied State will go to the High Court or the Supreme Court.
Barely 24 hours after the Constitutional Amendment Bill was passed in the Rajya Sabha, the Revenue Secretary said it would be premature to expect the GST rate to be 18 per cent.
Barely 24 hours after the Constitutional Amendment Bill was passed, the Chief Economic Adviser [Arvind Subramanian] reiterated that a rate higher than 18 per cent will be inflationary. It is obvious that the Economics Division and the Revenue Department are at loggerheads. They tried to paper over these differences but now these differences are out in the open. Between reports, between views expressed by various officers, why should I not accept the view of the Chief Economic Adviser because he is, after all, the government’s Chief Economic Adviser?
Dr. Subramanian’s report assumes higher tax rates on gold to 2-4 per cent and uses the 2013-14 tax base which did not include the cesses imposed in the last two years, the government says.
No, the tax on gold is 2 per cent now — 1 per cent for the Centre and 1 per cent for the States. The cesses imposed after 2013-14 add up to no more than 1 per cent to the tax rate. He has already provided a cushion. With RNR [revenue neutral rate] at 15 to 15.5 per cent, if the standard rate is 18 per cent, there is still a cushion of 2-2.5 per cent.
He has indicated that he might be updating his report.
I hope that he will do it as an independent professional and an independent academic.
Will you accept a higher rate, if he suggests a higher rate now?
All I can say is that a higher rate will be inflationary. And the CEA has — even after he said, “I may update my report” — reiterated that anything more than 18 per cent will be inflationary. I am all for progressively reducing indirect taxes, which is what I did in 1997, which is what we did between 2004 and 2014. I would never support an increasing rate of an indirect tax. That is a policy approach. Indirect taxes, which are regressive, must be progressively lowered. Direct taxes, which are progressive taxes, must be gradually increased.
Why did the Congress give up its demand for the constitutional cap of 18 per cent on the rate?
Because the Constitutional Amendment Bill is not a Bill fully under the control of Parliament. There is another set of players, the State governments, which has to ratify the Bill. And the State finance ministers, barring one or two Congress ministers, seem to have persuaded themselves to think that the cap should not be in the Constitutional Amendment Bill. So we had to necessarily defer to their opinion, but we are not giving up our basic demand that there must be a cap on the standard rate.
It seems that the Central legislations for the GST will most probably come as money bills now. The Rajya Sabha may not get to have a say on this cap.
That would betray the government’s lack of good intention. GST is a transformational piece of legislation. Just as the Central Sales Tax and the later avatar, the VAT [Value Added Tax], have occupied the field for nearly 80 to 90 years, GST will occupy the field for at least the next 50 years. If we are making a law that will occupy the field for at least the next 50 years, if I were in government, I would offer a debate in both Houses. I would offer a vote in both Houses. They have a majority in the Lok Sabha, they can pass it. I presume they have a simple majority in the Rajya Sabha. If they bring it as a money bill, then that indicates that they do not think they have even a simple majority in the Rajya Sabha. If a government is [implying] that it does not have a simple majority in the Rajya Sabha, I think the government no longer represents the people!
From what we have heard so far, the GST being readied doesn’t really seem like a ‘one nation, one tax’. Isn’t it true that there won’t be a single national tax across States, and goods and services? It will actually be a Central tax plus 29 State taxes. There could be 3-4 bands for these taxes for different types of goods and services, plus, in all probability, GST Council-approved cesses by States and the Centre.
Bands are not inconsistent with the concept of one tax. As long as there are wage goods and demerit goods, it is perfectly right to have a standard rate and a standard minus rate and a standard plus rate. That doesn’t take away from the fact that there is a standard rate. The standard rate will fall on, say, 70-75 per cent of the goods and services, which doesn’t derogate from the principle that there is ‘one nation, one tax’. But if each State begins to depart wildly from the standard rate and the GST Council allows that, that will be a great setback, a great pity. The GST Council must enforce the rule that there can only be three rates: a standard rate, a standard minus rate, and a standard plus rate. Yes, the GST Council can take a second look at the standard minus or a second look at the standard plus, but, if there are 29 standard minuses and 29 standard pluses, I am afraid the GST Council would have lost control over the subject. I don’t know if they are allowed to impose any cesses over and above the GST.
The question was put to the Finance Minister in the press conference on Thursday, and he said that it would be the decision of the GST Council.
We will have to look at the model GST law.
How can States be convinced that the GST won’t lead to loss of their financial autonomy?
Because, by definition, RNR means that they are not going to lose money. Add to that the efficiency gains that the GST will bring, the reduction in tax evasion, the fact that GST will promote growth and trade — all that should give the confidence that, in the medium to long term, the GST will actually bring them more revenues than the current multiplicity of rates brings them. This is exactly the kind of fears they had with the VAT, but those fears were disproved in a matter of 3-4 years. If you believe in GST, then you must also believe that the GST is a more efficient tax. You must also believe that it will promote growth and trade. I believe that. If the finance ministers of States don’t, then that means they don’t believe in the concept of the GST.
Will the GST translate into an altered federal relationship between the Centre and the States?
I don’t think it changes anything. It only means that instead of every State imposing a tax, they will sit together and decide what that tax rate should be. I don’t think it is a great loss of sovereignty.
