Experts explain: Problems that GST may face post passage

While Poddar said there needs to be clarity on mechanism for dispute resolution for states that deviate from GST council recommendations.Below is the transcript of Satya Poddar and Haseeb Drabu's interview to CNBC-TV18's Shereen Bhan. Q: The Constitutional Amendment Bill, the draft has now been put forward by the government and it looks like there are about six to seven key amendments that the government proposes to move. Let me start by asking you about whether you are satisfied on what the government has said with respect to the amendments to the consolidated fund of India to ensure that state levy’s or the IGST monies will not go into the consolidated fund of India? Drabu: Let me start by first saying that what he said in the empowered committee that in its present form, GST Bill, the amendments will not be applicable to Jammu and Kashmir (J&K). So, that is one specific case because we have our own constitution and we have our own constitution powers of tax services, we are the only state in the country that has a levy on services. So, it will not apply to us. However, having said that for J&K, I think a part of the empowered committee of finance ministers broadly, yes the technical issue of money getting into consolidated fund and how it would be moved out of the consolidated fund across so many states has been resolved to the satisfaction of what was discussed in the empowered committee. From what I can make out, basically two concerns still remain. One was the language on compensation; a) there were two issues, one was that initially the draft had suggested that the parliament may by law -- may, which was transformed to shall and I think that has been accepted. However, the word full compensation for five years, the word full has not been incorporated. So, I think there is some concern which I am sure the Union Finance Minister would clarify tomorrow while kind of moving the amendments; that is one kind of concern area which all states had shared that it must be given a definitive thing that it is full subject to a criteria for compensation which will come in not as a part of the amendment but as a part of the law and so on and so forth. Second part relates to the amendment on Article 270 clause 1A and 1B which refers to the inter-state GST (IGST) unclaimed credits not being a part of the divisible pool. I think that also needs some clarification for the states to be fully on board for this and this was discussed both in the empowered committee as well as the select committee of Rajya Sabha had recommended that the unclaimed credits on IGST should form a part of the divisible states which doesn’t seem to have been made. The other parts in terms of as you are saying which is correct that in terms of the language of the constitutional amendments, the generics are fine, this is what is discussed in the empowered committee and I would imagine it should not be a problem for any states in terms of accepting the broad language of the constitutional amendments and whatever is agreed to in the empowered committee discussions and negotiations, that was in good faith and that part has been honoured.Q: We are pretty much at the climax at least as far as the GST constitutional amendment bill is concerned. There is plenty of work that we need to get done before the GST in fact can rollout. However on the back of what you have seen today of the likely amendments, the proposed amendments, especially to do with the dispute resolution mechanism that has been proposed, are you satisfied, do you believe states will be as well?Poddar: The constitution plays a very delicate balancing role between the autonomy of individual states and the need for harmonization. What has happened is that under the constitution the GST council recommendations are not binding, they are only recommendations and the states are free to choose, to adopt or reject those recommendations.So, question arises is that if the states deviate from the GST council's recommendations, what should be the mechanism for bringing them back to the common harmonised framework that the GST council is recommending? The constitutional amendment simply states that there will be a mechanism for dispute resolution or there shall be one but we still don't know how the disputes will be resolved, what will be the consequences for those states which deviate from the GST council recommendations. I doubt that the dispute resolution mechanism will have the power to punish the states which choose to deviate from the GST council recommendations. I think there is not much we can do about it. It is largely based on fear of the states that if they have to give up their fiscal autonomy, what are the consequences and how much fiscal autonomy they will have and the dispute resolution mechanism is in a way the constraint on the fiscal autonomy they are going to exercise.The good news is that all of those discussions are largely horse trading between the centre and the states and they don't have an iota of impact on the economy. Impact on the economy will depend entirely on the design of the GST and to what extent that design is good for the economy and the GST compliance procedures are simplifying.Q: While this wasn’t specifically discussed  at the state empower finance ministers panel, at least that is our understanding, we believe that there was some sort of guiding principles that the empowered panel arrived at to determine the rate going forward. The centre continues to bat for 18 percent which is as per the Subramanian panel's recommendations but we are given to understand that states find anything between 20-22 percent the more acceptable rate. Can you take us through where things stand at the state empowered panel's meeting on rates?Drabu: Broadly if you were to look at it, the situation today is that we are operating in a regime broadly between 27 and 29 percent as is various basis with all the central and state levies together. Of course there are interstate variations but broadly the number is 27-29 percent. What the empowered committee did discuss in the guiding principles you are referring to is that the empowered committee inprinciple agreed to a substantial reduction in the tax rate which is consistent with lower inflation and also protects the level and the buoyancy of the current revenues of the central and state government.Now these numbers that you are throwing up - 20-22 percent are all numbers which everybody can speculate on. As a matter of principle there is a consensus in the states that we would look at a substantial reduction in the tax rate which would be consistent of course, which would reduce the incidence of tax on the common man and is consistent with a certain level of inflation. So, that is the broad principle.Now what substantial reduction means will evolve over time and that is what one of the contentious issues would be. However when you talk of constitutional amendments I don't think there is need to put a rate in the constitutional amendment. This will all come as a part of the subsequent work that will be done by the GST council and the states and the centre together.So, significant reduction is what is the guiding principle that we were talking off.I also want to come in on this issue of dispute resolution mechanism which I was talking about. It is not that the states can be punished but broadly and this is not that it has been discussed in the empowered committee but one can look at various options in terms of how to bring this because the 14th commission and the 13th commission, earlier even the 9th commission had introduced a concept of conditional grants that if you do certain fiscal changes and fiscal reforms, a certain amount of money will flow to you. Now it could be linked to compensation that if states move out of line, what is the way to get them back on line is to link compensation to the behaviour of the state. If you are going against what the consensus is then a certain conditional compensation is what can be worked out.Obviously you can't anticipate the kind of disputes, the kind of issues that will come up, so to that extent it is a work in progress thing. We do have 5 years to actually  put this in a form where you will institutionalise the mechanism of dispute resolution because there are three sets of GSTs - the CGST, SGST and IGST with each having its own kind of complications.  How that will pan out across states, producer states, consumer states, centre versus states and the GST council where 66 percent weightage is for centre, so right now it is a fairly complicated situation. A lot of work will have to be done, a lot of skill has to be shown in getting this through on  the ground.   Q: I want to pick up on the point that Haseeb Drabu made there about the resolution that has been adopted at the state empowered panel meeting saying that a significant reduction in rates should be the guiding principle to arrive at the revenue neutral rate. We have seen what the Subramanian panel has suggested. The arithmetic that we are getting from the government seems to suggest that the revenue loss in FY18 could be about Rs 30000 crore odd if the GST rate is 18 percent and compensation to states could be at about Rs 60000 crore with a GST rate at about 20 percent. How would you interpret the comments that have come in from Haseeb Drabu on the significant reduction in rates and also what would you anticipate as the compensatory amount as well as the impact in the first year of the GST rollout?Poddar: The statement or the commitment being given by the states and the centre that there will be significant reduction in the tax rates to me is an empty statement. It doesn't really have any operational implications. They key guiding principle is that the tax should be revenue neutral. Now broader the tax base, lower the tax rates.  My experience in New Zealand and few other countries where I have been involved in the design of GST type tax is that the lower the rate more the revenue you get.In New Zealand for example they brought in the GST at the rate of 10 percent. In the very first year their actual revenue turned out to be 42 percent higher than the revenues projected on the basis of revenue neutral rate calculations. This is exactly what can happen in India. If you bring in the tax at a lower rate on a broad base with no exemptions or very few exemptions, you don't need the tax rate of 18 percent.Arvind Subramanian went to great pains to illustrate how the revenue neutral rate need not be 18 percent, it can be as low as 13-15 percent. At that rate you have a very significant dividend coming from better compliance, improvement in economy and the larger GDP pie.