With goods and services tax (GST) now close to reality and the government aiming for rollout by July 1, Former Finance minister, P Chidambaram thinks October 1 would be the best time to rollout GST.
In an exclusive interview to CNBC-TV18, he says people need more time to adjust to change in the tax regime. “It's undesirable to set such a tight roll-out target for GST,” adding that it is also impractical.
Neither does he believe it is ‘One rate, one tax, one nation’ bill, especially with so many different GST rates proposed, it is more a ‘multiple-rate tax, one nation’ bill. He thinks it is important to cap the rate at 18 percent and eventually converge all other rates to 18 percent. It is a mistake to have so many rates (0,5,12,18,28 and 40).
Talking about non-performing asset (NPA) issues, he says the current government has not approached the problem properly, they have scared the bankers – the bankers are unwilling to take any action and they are scared of 3C’s that is CBI, CVC and CAG.
Having an oversight committee – the Bank Board Bureau was the worse idea that the government could come out with to solve the NPA issue, believes Chidambaram.
According to him, there will always be NPA problems when there is an economic downturn, so the government needs to change its attitude towards NPAs because as the economy comes out of the downturn, many of the loans will be repaid. However, there is a need to differentiate the legal borrowers from the others.
He clearly believes that the economy is still in a trough and not growing, so it could be a wrong time to expect every NPA to get resolved.
Below is an excerpt of the interview.
Q: The goods and services tax (GST) is now a step closer to reality. July 1 is what the government is working with in terms of the rollout plan. Do you believe that that target is going to be achievable?
A: They may achieve it, but I think it is undesirable to set such a tight target. I think it is also impractical. Thousands and thousands of people have to get familiar with GST and switch over to a completely new regime. There will be mistakes, there will be missteps and I think they need more time to adjust to the change.
Secondly, it is absolutely necessary to give what I would call a trial period. People must go through a trial period. When they get familiar with filing returns and compliances, the goods and services tax network (GSTN), the network should be proved in trial.
Q: The trial period for the GSTN at least starts in May is what we are given to understand from the government.
A: But, how many people will actually file real time data on GSTN unless you select a very large sample of people and persuade them to go through the trial period. I do not know what kind of sample they have selected, how many people are obliging them. So, October 1, the second half of the year, in my view, is the best time to launch GST officially and finally.
Q: But there is a constitutional compulsion to get it done in September or by September.
A: There is none. All you have to do is get the President to assent to the laws, notify the rates and say the GST will be levied and collected from October 1. That is perfectly possible.
Q: So, it is as simple as that, you believe because the government has said that we need to get it done before the middle of September because that is the constitutional compulsion.
A: We need to get the act assented and a notification made. So the notification can say tax will actually begin to fall on transaction on October 1.
Q: If the government chooses to do that or not, we do not know. Some state finance ministers have said that they would like the GST to roll out perhaps on September 1, versus July 1 which is the time table that the government is currently working with. But let me ask you about the law in itself. The congress chose not to move any amendments because the former Prime Minister, Mr Manmohan Singh apparently advised you not to do so. Jairam Ramesh said that he would have liked to move some amendments. What would you have liked to move, if anything at all?
A: There was only one amendment proposed by my colleague, Mr Jairam Ramesh and we advised him not to move it because that would perhaps lead to unravelling the whole compact that has been arrived at in the GST Council. He wanted to interpose parliament between the GST Council's recommendation and the government's notification. We pointed out that if that was done in the central GST law, the state legislatures would also want to do it as far as the state GST law is concerned. And if 29 states interpose their legislatures between the recommendation and their notification and down the line, if one or two states' legislatures do not approve the recommendation, the whole thing will unravel.
Therefore, merit pointed to our direction where we agreed to this arrangement where there is the principle of shared sovereignty. Each legislature and parliament seeds sovereignty to the GST Council and the GST Council's recommendations are accepted as a decision of parliament and the state legislatures. I think that is the correct approach. There was no other amendment.
Q: But on the issue of GST and I know that the congress believes that GST was the Congress' idea.
A: Was it now?
Q: I am not saying it was not. And it was because states like Gujarat held back that you could not go through with the GST. I remember several times over and several of our interviews, you said that the BJP specifically, the now Finance Minister told you that he did not have the appetite for further reforms and they chose not to support you and the GST. But do you believe that if you had put your mind on the issue of compensation which is what seems to have convinced states to have come on board with this idea of shared or pooled sovereignty that perhaps GST could have been a reality under the UPA?
A: Look at the record. I had offered compensation. In fact, I had offered full compensation for three years. Compensation is not the sticking point. There were other minor issues. The biggest obstruction was the unwillingness of Gujarat, Madhya Pradesh and later, Tamil Nadu to agree to the very concept of a GST. They are still active players, Mr Raghavji of Madhya Pradesh and Mr Saurabh Patel of Gujarat are there, why do you not ask them? Go through the minutes and look at what they said. It is all recorded. So, both of them clearly were under instructions from their respective Chief Ministers not to agree to the idea of a GST and Tamil Nadu joined the bandwagon and the Chief Minister of Tamil Nadu, Ms Jayalalithaa instructed her minister not to agree to a GST.
Q: That is water under the bridge now and the GST, whether it is July 1, September or October, is going to meet its date with India. But on the structure of the GST and of course, the congress was trying very hard that the rate be capped and included in the law at 18 percent, 18 percent is just one of the rates and the hope is that a majority of goods will be either in the 18 percent basket and the 12 percent basket and the limited number in the 28 percent basket, as per the current structure of the GST. Does it allay now, your apprehension as far as the rates itself are concerned?
A: Therein lies the imperfection of the bill. This is not a one rate, one tax, one nation bill. This is a multiple rate, one tax, one nation bill. That is why we said we must cap the rate at 18 and eventually converge all other rates to 18 percent.
Q: The government's argument is that the reason why we need different tax rates is because you cannot, what is currently in the 5 percent if that were to move to 18 percent or what is 12 percent were to move to 18 percent, there would be an inflationary impact and the burden on consumers would have been far too much as well as the incidence of tax itself on the Indian people.
A: But that is the price you pay for a change to a new regime. Do not call it a one tax, one nation regime. It is a multi-rate tax, one nation regime. Therein lies the imperfection. I accept that there are compulsions for the imperfection, but you must lay out a roadmap to converge on one rate. Unless we move to one rate, it is not a GST. And it was a mistake to have four rates. In fact, it is six rates – zero, 5, 12, 18, 28 and 40 percent. There was no compulsion to have six rates. The chief economic advisor had reported and I had supported it that there must be a modal rate, a standard rate and a standard minus rate and a standard plus rate. So, we could have started with three rates and then converged it to one. They are starting with six rates. Let us see how quickly they will converge. But until they converge, let us be absolutely clear, until they converge, it is not one rate, one tax, one nation.
Q: What is going to be the other challenge in terms of administration and I ask you this to share with us your own past experience because clearly there are going to be issues between the centre and the state, cross-empowerment has been a big controversial issue which now stands resolved. But again, the mechanism of how this 50-50 is going to be split between the centre and the state in terms of assessees and who is state going to assess, who the centre is going to assess, that mechanism has yet to be worked out. But what would your prescription be?
A: There are plenty of issues they have not yet worked out which is one of the reasons why I say, you should not rush through the implementation. Plenty of issues. For example, the turnover. If my turnover is Rs 1.5 crore this year, I will be assessed by the centre or 90 percent of assessees will come under the centre. If my turnover falls below Rs 1.5 crore and then after 2-3 years my turnover once again goes above Rs 1.5 crore, they have not sorted that out.
Likewise, which are the 90 percent assessees that the centre will assess and which are the 10 percent the states will assess? Below Rs 1.5 crore, which are the 50 percent that the centre will assess and which are the 50 percent that the state will assess? Will they pick and choose? Will there be a random selection? I do not know, all these have not been worked out. And then, the GST constitution amendment bill, said the GST Council will be the dispute resolution body for disputes between state and state and state and centre.
Now, if suppose a dispute arises within the first few days of implementing GST on July 1 where is the dispute resolution body? Where are the rules for dispute resolution? There are many other issues. I can flag a number of issues. How do you make a compoundable offence also a non-bailable offence? The accused is produced before a magistrate. What should the magistrate do? Compound and let him go or refuse him bail and send him to jail?
There is an issue about definition of taxable turnover. If you look at the definition closely, the plain language says exempt supplies that is exempt goods and exempt services will also be included to calculate taxable turnover. These may appear to be technical issues, but administering the act is administering a technical matter. Every single issue must be resolved. I am not saying it can be done to the last detail, but at least the major issues which we have flagged, I have flagged it in several interviews, it was flagged in parliament, these major issues must be addressed. There must be an absolute consensus on these issues before we actually implement GST.
Q: And you are still hoping that it will roll out on October 1 so that it gives ample time.
A: That is my advice.
Q: Let me also ask you about some of the other issues that the government is grappling with. There are all kinds of ideas at this point in time on how the government ought to address the crisis that the banking sector is faced with, the non-performing asset (NPA) issues. A large part of that goes back to the UPA's tenure. A large part of the NPA problem is linked to that. But if you were in North Block today, how would you like to address the NPA issue.
A: This is not the first time that the NPA problem has come up. In fact, it was more acute twice before. Once in 1997-1998 and again in about 20011-2012. We did not create a scare about NPA. We empowered bankers, called the bankers and told them you gave the loan, you recover the loan. They will do it.
What they have done is, scared the bankers out of their wits. Nobody wants to settle anything. Nobody wants to sell distressed assets. Nobody wants to enter into compromises or write-offs because as one officer told me, one banker told me, they are afraid of the three or four Cs, Central Vigilance Commission (CVC), Central Bureau of Investigation (CBI) and Comptroller and auditor general (CAG) and one more he said. This is not the way to run banks.
I think they created and unnecessary scare and they are paying the price for creating the scare.
Q: But the scare has not been created by the government. You have written extensively about why there is no credit offtake. Banks are saddled with NPAs, they are not willing to lend given the fact that they are troubled at this point in time, so how does one break through this vicious circle?
A: That is for the government to come up with solutions. They are in government. They think they know the answers, let them suggest answers. But I can say categorically that the way they approached the NPA problem was a wrong way. Raghuram Rajan cautioned them. I said, if you look at every transaction he said, if you look at every banking transaction, every loan as criminal or suspect, that will be the end of both lending and entrepreneurship.
Anyway, you are riding a tiger, now dismount from the tiger or tame the tiger.
Q: Since you are giving your advice on the GST, what is your prescription on how to deal with this problem? I know it is for the government to decide. They have set up an oversight committee. They may perhaps strengthen or empower the oversight committee further. We do not know if there will be any changes to the banking regulation act as is being suggested at this point in time, but what could the changes perhaps be?
A: That is the worst idea, setting up that bureau. What is it called?
Q: The Bank Board Bureau (BBB), it is already in existence.
A: That was the worst idea you can have.
Q: Why?
A: You set up a bureau over the banker, over the Chairman and the Managing Director and that bureau will resolve every issue, everybody will kick it up to the bureau. Why will the Chairman and Managing Director take responsibility? I have said that the BBB is a bad idea and I think a future government will come in, rescind it.
Q: But to be fair, one of the problems and you alluded to it yourself is that bankers are apprehensive and hesitant to take any decision for the fear of the four Cs. But maybe the BBB or the oversight committee provides the requisite political cover.
A: So, why do they not take the decisions then? What decisions have they taken in the last several months?
Q: Do you believe that there are amendments to the laws that are required to deal with NPAs?
A: No, must change your attitude to NPAs. There will be NPAs when there is an economic downturn. But then, as the economy comes out of a downturn, many of those loans will be repaid. You will have to hold your hand to the non-criminal borrower. Criminal borrower, deal them under law. But in the eyes of this government, every borrower who has defaulted is a criminal.
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