Frequently a dilemma is best illustrated by an analogy. Here is a political dilemma reflected in an analogy from cricket.
A team wins the toss and is batting well. In the dug-out, padded up is its best pinch hitter. Suddenly, the well set batsman is run out and a storm breaks out. Now the pitch is, to borrow from commentators, doing things and has turned unpredictable. Does the team send in its pinch hitter or a grafter to consolidate?
Now transpose this to the Narendra Modi government. Arguably, it has batted well thus far. Along comes an unprecedented storm, the “demonetisation”. Does the government follow the shock of “demonetisation” with another shock and push for the GST in 2017? Or does the government read the wicket, use data emanating from the note ban and didgitisation to keep the reforms scoreboard ticking and deliver a smarter GST in 2018?
Finance Minister Arun Jaitley has observed that there is a “constitutional compulsion” to have the GST in place by September 2017 and asserted the government’s intention to stick to the deadline. There is also talk about a special session to pass the Central GST Bill, the State GST Bill and the Integrated GST Bills.
Yes, there are issues pending in the council of empowered ministers—for instance, who will tax whom and what will be taxed at what rate? The incomplete template, though, is not the critical hurdle now. There is a new political wall of resistance post November 8. States like West Bengal and Kerala have virtually ruled out the rollout of GST in April 2017 and have blamed the “devastating” disruption of demonetisation for it.
The issue is not whether the government can quell the resistance and get done all that needs to get done. The question is whether the political economy can sustain two disruptions in sequence within months? The issue is whether the system—already flailing to cope with demonetisation—has the bandwidth to manage the post-GST challenges.
Post November 8, the political economy has been rendered unto a landscape of known unknowns and unknown unknowns. The known unknowns are questions about causal factors—from when the Reserve Bank of India will remonetise banks to when ATMs will live up to the definition of Any Time Money to when withdrawal limits will be lifted. The unknown unknowns are the consequences of the shock—there is no way of knowing with any certainty the impact on growth and revenues.
Proceeding with the GST in the face of unstated and unanswered questions that litter the political economy has many pitfalls. Consider this: Clause 18 of the 2016 amendment to the Constitution explicitly states, “Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the states for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.”
The parade of claims merits attention. Kerala Finance Minister Thomas Issac has claimed that in just 10 days, the state lost `2,000 crore. West Bengal Finance Minister Amit Mitra asserts that the state could lose as much as 25 per cent of its revenues. Telangana fears it could lose over `3,000 crore in revenues. Ditto with Tamil Nadu. Bihar may slash its 2016-17 expenditure fearing a loss of over `5,000 crore. Indeed, BJP governments in Goa, Madhya Pradesh, Haryana and Jharkhand fear a drop in revenues by as much as between 20 and 30 per cent.
Demonetisation has upended some basic assumptions. The fear has been that since the GST is a destination tax—that is, taxation at the point of consumption—it is the producing states that may lose in terms of revenues and therefore must be compensated. However, the first reports of loss of revenues are from the so-called consuming states—and from producing states too. The question is, must the GST be burdened with the effects of demonetisation.
It is not just the states. Demonetisation could impact the revenues of the Centre too—16 of India’s top companies, for instance, have apparently paid lower advance tax than in previous quarters. Perhaps there is merit in the contention about future revenues, but the upcoming Budget will reflect only what is earned, not what will be earned next fiscal. There are also unquantified costs of demonetisation, the several exemptions, the impact of lower growth and then the cost of the stimulus that may be needed to prime the economy. Add the consensus view that initially GST could fuel inflation.
The challenges are not just domestic. The elephant in the room is global uncertainty. Donald Trump has promised to reconfigure the idea of global trade and of labour mobility. These have a potential to disrupt exports, existing models of business and streams of revenue and job creation. There is also the spectre of rising commodity prices—Brent crude is hovering at $55 per barrel. How this will play out on inflation, interest rates, currency, government finances and consumption is really a black box that awaits data for decoding.
Given the circumstances, it makes enormous sense to read the wicket and play. Indeed, there is an opportunity at play here. The push for digitisation of transactions will bring in new tax payers and data into the system. It will enable the empowered ministers to re-assess the landscape and arrive at decisions based on new data on revenues. For all you know, it could lead to a lower level of taxes under the GST.
Remember, it has been only 40 days and even on April 1, 2017, the economy would have transited through barely two quarters. There is no reference or precedent that can be used to assess the impact—positive or negative. The only measure will be real-time data that will only be available mid-2017 at the earliest.
India has waited for ‘one nation, one tax’ since 2004, when the Kelkar Committee first introduced the idea. It can afford to wait for a year more—especially for a smarter GST. The known unknowns and the unknown unknowns make a strong case for postponing GST to April 2018. They do say discretion is the better part of valour. Don’t they?