In the aftermath of the election and the first parliament session, we lost sight of the seventh anniversary of the goods and services tax or GST. After several decades of sustained, quiet effort by many people, the president ushered it in at midnight on July 17, 2017.
In 1986, the government of India took the first step in the form of MODVAT, a type of value-added tax limited to central excise duties. My introduction to VAT occurred in the mid-1990s, when I was finance secretary of Kerala. Amaresh Bagchi, the then director of the National Institute of Public Finance and Policy, held a meeting of state finance ministers and secretaries.
My minister, C V Padmarajan, asked me to represent the state. I was new to VAT on a national scale, even though my state had introduced it in a few select industries. With the approval of my minister, I recall I opposed the introduction of VAT at the national level, primarily because it would adversely affect the state’s flexibility in revenue collection. My connection with finance ended a couple of years later when I moved to the commerce ministry in 1996, where I remained until 2004. I then came to the finance ministry as revenue secretary.
In 1994, a service tax was introduced at the central level. The discussion gradually veered towards a goods and services tax in the 1990s, but the political uncertainty prevailing in the second half of the decade lowered the momentum. In 1999, there was a significant new development when an empowered committee of state finance ministers was formed—an innovative exercise in cooperative federalism.
However, many years had to pass before India’s midnight tryst with fiscal destiny in 2017. In 2004, the Centre moved to a VAT-based system. Finance Minister P Chidambaram felt at the time that a further push towards fiscal integration was needed and called a meeting of state finance ministers to take another step forward. The purpose was to replace the general sales taxes prevalent in different states with a nationwide VAT. The states were not convinced and remained apprehensive about loss of revenue.
At this point, Chidambaram passed a handwritten note to me and other finance ministry secretaries. He suggested that we set apart `5,000 crore to reimburse losses incurred by the states. Most of the states fell in with the suggestion, and they accepted a three-year progressive plan for reimbursement of audited losses. A few states, primarily ruled by the opposition BJP or allied parties, opted to stay out of the VAT system during the introduction, but adopted it later.
In 2008, the empowered committee of state finance ministers laid out the structure of the GST. By this time, much academic work on GST had also been done. Several GST models—including the Kelkar-Shah, Bagchi-Poddar, Australian and Canadian models—had evolved by then. The final model adopted resembled the Kelkar-Shah one, with elements of the Canadian model. This involved setting up the required technology systems, building a GST model that is revenue-neutral to the states, and achieving a grand bargain between states and the Centre to integrate divergent tax systems. In 2011, a team was constituted to lay down the roadmap and draft the 115th Constitutional Amendment Bill. The parliamentary committee submitted its report on the Bill in 2013.
Yet, the empowered committee was still not unanimous in approving the change; the BJP states, in particular, expressed reservations. There was never a doubt that a unified system of taxes was essential for the economy. Its advantages were many. The GST system is designed to give credit at each level of taxation for tax already paid. This meant that the cascading effect that arises when a tax is imposed at each level would disappear, thus bringing down the price and making the system self-policing. It would become much easier to eliminate the effect of tax on exports. The tax base would increase, and goods and services would be brought under one umbrella.
Some states still demurred. The situation changed when the UPA lost in 2014 and the NDA came to power. The BJP states then consented to the introduction of the new system. It was known that the technology systems were not yet fully ready, but knowing well that India is a ‘last-minute’ country and that ‘jugaad’ would repair the deficiencies in due course, the prime minister took the bold decision to waste no more time and introduce GST right away.
“I request those who have fears to dismiss them,” he said. He alluded to the time individuals take to adjust to new glasses. “Similarly, if we try to adjust to the new system, we will definitely be able to integrate ourselves with it. It is time to stop the rumour bazaar. It is time we concentrated on development and for the betterment of this country. Let the GST be carried forward till the point it has a positive impact on the world’s economy.”
We still struggle with several aspects of GST. At a seminar held on July 1 to celebrate its seventh anniversary at the Gulati Institute of Finance and Taxation in Thiruvananthapuram, the keynote speaker was Vijay Kelkar, the man who contributed so much to the tax system’s evolution. He recognised the many defects that still plague the system. He said similar problems exist in other countries, too, that had adopted a value-added taxation system much earlier than India, such as Australia and Brazil.
There are too many exemptions and different rates, and the coverage is still inadequate. Kelkar suggested introducing the third tier of government, the panchayati raj system, into GST sharing. This would give them a sound capital base to borrow from the market and take up self-sustaining schemes, thus stimulating new growth in cities and villages. A representative of the real estate business said GST had helped him significantly lower costs, secure goods from all over the country much faster and reduce inventories. On the other hand, representative of smaller enterprises complained bitterly about its technical complexity and frequent changes.
GST is the most significant example of how democracy can achieve great results if states and the Centre work together. If the same principle is extended to agriculture, industry, and general reforms, Team India would become a reality.
(K M Chandrasekhar is former Cabinet Secretary and author of As Good as My Word: A Memoir. Views are personal. kmchandrasekhar@gmail.com)