Haseeb Drabu on GST after 6 years: Why the MRP regime needs to be abolished as part of reforms

Former J&K Finance Minister Haseeb Drabu

As the GST Council meets for the 50th time in a fortnight from now, it should celebrate its golden jubilee of sorts. The Council can and should look back at the last six years of the GST regime with a great deal of satisfaction having instituted a new indirect tax regime, changed the dynamic of federal fiscal relations, and catalysed formalisation of the informal economy.

Perhaps, the golden jubilee meeting should also introspect a little as to why the consensus is fraying more than a bit for the Supreme Court having to remind both the constituents of the Council of the “grand bargain” they had entered. There is no denying the fact that post-pandemic, the Centre has tried to undermine the GST Council, be it through imposition of cesses which have gone up manifold or trying to wriggle out of commitments made.

There is need for both the Centre and the states to reassert and reassure each other that neither has usurped the other's powers nor compromised their tax authority but pooled their indirect tax sovereignty. The GST system is incorporated in the Constitution as amended by the Parliament, having been passed by the legislative assemblies of all the states and UTs. It is a not a bilateral deal between two ministries or an executive decision taken unilaterally.

If anything, it needs to be strengthened after having endured the transitional troubles of businesses and adjustment anxieties of the overall macro-economic system made acute by tardy implementation, procedural lapses, technological glitches.

Now, six years down the road, the revenue collection of a lakh and a half crore a month, from more than 125 crore returns filed, with 300 crore e-way bills generated for 1,50,00,000 active tax payers is evidence that the system is running well for the government, as well as the businesses. And all this despite the shock of demonetization which resulted in a sharp drop in the economic activity and the pandemic which brought it to a grinding halt.

The customer, who has benefited from not bearing the burden of cascading taxation, needs some more tangible benefits for the system to go to the next level. It is time to abolish the maximum retail price (MRP) system—an anachronism from control raj days. The MRP system was relevant in the pre-liberalization economy that operated with producer taxation. The producers would work out the costs and margins of the distribution chain and allocate them within the MRP. With the change to a consumption tax, however, the final payment of tax occurs at the last stage. Here, it becomes an anomaly to have an MRP. It over-determines the system besides contributing to inflation.

Some sectoral issues that have surfaced—chief among them being textiles, tourism, exporters, and handicrafts—which need to be resolved. For tourism, it is imperative that the tax refunds system is put in place as soon as possible. The effective tax burden on exports as well as handicrafts has become high compared to the previous tax regime. The issue of embedded taxes for exports will have to be resolved through a proper mechanism and not in an ad hoc manner. The IDS in textiles where rate of tax on inputs purchased is more than the rate of tax on outward supplies needs to be set right.

But more than these, in the last six years, the institution of the GST Council has remained under-leveraged by the states. The biggest failure so far has been its unrealized potential as a forum for states to coordinate intergovernmental action and proactively build a sub-national consensus on an indirect taxation. Through the GST Council, the states should contribute to building a national indirect tax policy based on their diversity of sub-national experiences. The state governments, having been given a voice and vote, have been reactive rather than proactive in their interventions. The states’ own victim mentality in fiscal federal policymaking has prevented them from collectively taking the lead. This must be the centrepiece of GST 2.0 kicked off by states' own GST on petroleum, real estate, power and alcohol.

(The author is a former Finance Minister of J&K and a member of the GST Council from 2015 to 2018. Views expressed are that of author's and not of moneycontrol.)