The Rise of Goliath

by AK Bhattacharya

  A fresh political hurdle came up by the end of 2010 when the Bharatiya Janata Party decided to oppose the launch of the GST. Leading the Opposition charge was none else than then Gujarat Chief Minister Narendra Modi. By March 2011, Mukherjee had readied a Constitution Amendment Bill to bring in the GST. But the bill had to be referred to the Parliamentary Standing Committee on Finance, which was headed by former finance minister Yashwant Sinha of the BJP. Two BJP-ruled states were opposed to the GST—Gujarat and Madhya Pradesh. In an attempt to bring Narendra Modi round to accepting the GST, Mukherjee visited Gandhinagar, the capital of Gujarat, and tried to convince Modi, but in vain. Gujarat Finance Minister Saurabh Patel made it clear to all that the manner in which the GST had been conceived would be a technical nightmare as traders and small businesses were simply not prepared. Madhya Pradesh Finance Minister Raghavji also was a staunch opponent of the GST as he feared that states, as a result, would be reduced to begging for central resources as they would lose the right to determine their taxes for meeting their revenue requirements.

  The GST process received a minor blow when the Left Front lost the Assembly elections in West Bengal in 2011. A collateral damage was the resignation of Asim Dasgupta, who as the finance minister of West Bengal had been chairing the Empowered Committee on the GST with sagacity and foresight. Kerala Finance Minister K.M. Mani succeeded Dasgupta, but the GST movement lost one of its biggest and avid champions. Help for the GST process, however, came from the most unexpected quarters. Yashwant Sinha, a BJP member and the chairman of the Parliamentary Standing Committee, believed in the idea of the GST. As finance minister in the Vajpayee government, he had already brought the Cenvat rates closer to a point where the introduction of the GST would become easier. When the 115th Constitution Amendment Bill, introduced in the Lok Sabha to launch the GST, was referred to his committee, Sinha was eager to complete the examination without losing much time. However, there was some reluctance on the part of the finance ministry team to expedite the clearance of the GST Bill by his committee. Instead of looking at the GST law, Sinha was asked if he could expedite clearing two other pending laws—the Companies Bill, 2011 and the Benami Transactions (Prohibitions) Bill, 2011.4 Thus, the consideration of the Constitution Amendment Bill on the GST had to wait for about a year. And when Sinha was ready with his colleagues to examine it after the Budget session of Parliament in 2012, Mukherjee had already begun his preparations for his election as the next President of the Indian Republic.

  The return of Chidambaram to North Block helped expedite matters with regard to the GST. He held a meeting with all the state finance ministers in November 2012 and promised to them that all the pending issues would be resolved by the end of December that year. Indeed, in his Budget for 2013–14, Chidambaram made a provision for Rs 9000 crore to compensate the states for the revenue losses they might incur after rolling out the GST. True, this amount was quite inadequate and did not satisfy the states, but it nevertheless showed Chidambaram’s resolve to move ahead with the GST. A decision that indicated the seriousness of the government pertained to the incorporation of the GST Network as a non-profit private limited company on 28 March 2013. The GST Network’s ownership pattern would be changed later, but its constitution as a separate outfit soon became a source of confidence among the states as well as trade and industry about the new taxation system.

  Yashwant Sinha, in spite of being a leader of the BJP and in the Opposition, responded positively and with sympathy to such government initiatives on the GST. His committee did its best to persuade the reluctant finance ministers of states like Gujarat and Madhya Pradesh and got Vijay Kelkar to make presentations to the state finance ministers to have their concerns addressed. The committee made many suggestions for improvements in the structure of the 115th Constitution Amendment Bill and returned it to the Lok Sabha for its consideration in August 2013. In these few months, Sinha emerged as the most articulate supporter of the GST reform. Earlier, as finance minister, his efforts at rationalizing the Cenvat rates were fully consistent with the idea and principles of the GST. And now in spite of his party not lending its full support, Sinha as the leader of the Parliamentary Committee examining the GST Bill produced a report that favoured a virtually flawless GST.

  Quite ironically, just two months later, Modi, who was still the chief minister of Gujarat, issued a statement saying that his government was opposed to the GST as it would lead to a revenue loss of Rs 14,000 crore every year. By that time, the Manmohan Singh government had lost all hope of getting the Constitution Amendment Bill passed by Parliament in the remaining months of its tenure before the general elections were due in May 2014.

  The general elections of May 2014 paved the way for a new government, headed by Narendra Modi. The Fifteenth Lok Sabha was dissolved by the President, Pranab Mukherjee, on 18 May 2014 as he constituted the Sixteenth Lok Sabha. And since the Fifteenth Lok Sabha got dissolved, the life of all the bills pending with it came to an end.

  The 115th Constitution Amendment Bill for the launch of the GST was one of those bills which got extinguished. The irony was not lost on anyone. Mukherjee as the finance minister had introduced the Constitution Amendment Bill for the GST, which he was effectively extinguishing as the President three years later. And a bigger irony would be that the man, who as chief minister of Gujarat had opposed the GST in 2013, would become one of its biggest proponents and usher in the GST at a midnight function in the Central Hall of Parliament about four years later.

  CHAPTER 25

  FROM CRITIC TO SUPPORTER

  The three-year journey the Narendra Modi government traversed before launching the GST on 1 July 2017 was marked by many exciting phases of development. As the newly elected Narendra Modi government took on the mantle of economic reforms and governance in May 2014, it lost little time in pushing for the launch of the GST even though its prime minister had opposed it as the chief minister earlier. In just about seven months, the Union Cabinet on 18 December 2014 approved a proposal to amend the Constitution to introduce the GST. A day later, during the winter session of Parliament, Finance Minister Arun Jaitley introduced in the Lok Sabha the 122nd Constitution Amendment Bill and set a deadline for rolling out the GST from 1 April 2016.

  The bill provided for a levy of the GST on supply of all goods and services except potable alcohol. What was proposed in the bill was a dual GST, but both the Centre and the states would be levying the taxes, to be known as the Central GST and the state GST. Parliament was also empowered to levy an integrated GST on interstate trade or on imports of goods and services. The bill also empowered the Union government to levy excise duty in addition to the GST on tobacco and tobacco products. For five categories of petroleum products— crude oil, petrol, diesel, aviation turbine fuel and natural gas—the bill had proposed that the decision to include them under the GST would be taken by the GST Council, which would take all decisions on tax rates under the chairmanship of the Union finance minister. All other state finance ministers would be its members.

  The decision of the GST Council would be taken through the support of at least 75 per cent of the votes, although it was indicated that as far as possible decisions at the Council would be taken by consensus. The Centre would have voting strength of 33.3 per cent, while the thirty-one states with legislative assemblies would have voting strength of 2.15 per cent each. In other words, the Centre would have the veto power in shooting down any decision if it is not in agreement with a proposal. Also, it would need at least twenty states to side with it before it could get its decision ratified by the Council. On the other hand, if twelve states got together they could use their combined voting strength to veto any proposal. The functioning of the GST Council was thus governed such that neither the Centre could take a decision overruling the majority of states nor could the states get together and take a decision ignoring the Centre. Since both the Centre and the states were giving up their respective powers to fix tax rates, they needed to be assured that the Co
uncil would reflect their voices. Of course, the Centre had slightly more power in terms of its freedom to levy excise duty on tobacco products and it could exercise its veto on its own, while the states could exercise the same power only if twelve states got together. It was a delicate power-sharing formula that the GST amendment bill had proposed.

  The Congress, with just about forty-four members in the Lok Sabha but enjoying good enough strength to stall the bill’s passage in the Rajya Sabha, realized that it could return the compliments to the BJP by raising objections to the bill and creating political hurdles. The principal demand of the Congress was that the GST rate should be capped at 18 per cent, while the proposed rate structure, which was still not finalized, had envisaged multiple rates and the top rate was much higher than what the Congress was demanding. The government rejected these demands outright as it was supremely confident of getting it passed by the Lok Sabha and was hopeful that it would be able to bring the Congress round to agreeing to support the amendment bill. The BJP leadership was not entirely correct in its assessment.

  At the end of the Budget session of 2015, the Lok Sabha passed the 122nd Constitution Amendment Bill on 6 May. The government’s joy over this passage, however, was short-lived. Six days later it was sent to the Rajya Sabha, where the Congress demanded that the bill should be sent to a Select Committee of the upper house of Parliament. It was finally agreed on 14 May that the bill should be sent to a joint committee of the Rajya Sabha and the Lok Sabha. The Congress in the meanwhile upped the ante and demanded that in addition to placing a cap of 18 per cent on the GST rate, the government should abolish the 1 per cent duty to be levied on interstate supplies and set up an independent dispute settlement body. The government realized that it was nowhere near convincing the Congress to support the bill in its current form. By August 2015, the BJP gave up its plans for putting the bill to vote in the Rajya Sabha. Almost a year later, on 3 August 2016, the Rajya Sabha passed the bill after the government moved three amendments.

  The spoilsport in the BJP government’s GST design was the 1 per cent duty that was almost quietly introduced in an apparent attempt to please the manufacturing states like Gujarat and Maharashtra. Nobody had any inkling of such a tax, which distorted the GST concept, till this was suddenly put up at a meeting between Finance Minister Arun Jaitley and Gujarat Finance Minister Saurabh Patel. Nobody in the finance ministry realized that what Patel had mooted would hugely undermine the GST principle. West Bengal Finance Minister Amit Mitra, who had played a key role in resisting pressure to dilute the GST spirit, had to return to Kolkata and could not stay back for the evening meeting where the 1 per cent tax was agreed upon. Once the idea of the new tax became public, industry was shocked and made presentations before the government to withdraw the proposal. Chief Economic Adviser Arvind Subramanian even went public with his reservations about it. For the Congress, the new tax idea turned out to be a godsend. The Congress upped the ante in its demand for changes in the GST structure as proposed by the BJP. After a few more rounds of consultation, the government agreed to drop the pernicious idea of the 1 per cent tax. That helped the GST Amendment Bill to move to the next stage of parliamentary approval.

  What changed the Congress approach in the following weeks, so much so that the Constitution Bill that could not be passed in August 2015 received the assent of the Upper House in August 2016? Deft political management by the BJP leadership and the Congress’s realization that it could not take its opposition to the GST beyond a point. A smart move to appoint the finance minister of West Bengal, Amit Mitra, as chairman of the Empowered Committee of State Finance Ministers on GST was made on 19 February 2016. The Committee had been without a chairman for a few months as K.M. Mani, Kerala finance minister, had quit his job in the state in November in the wake of corruption charges against him.

  Traditionally, the chairman of the Empowered Committee is always a finance minister from a state ruled by an Opposition party. Thus, it was Asim Dasgupta, finance minister in West Bengal during the Left Front rule there, till 2011. Sushil Modi, finance minister of Bihar, succeeded Dasgupta and continued till July 2013, when he too quit the Committee. Jammu and Kashmir Finance Minister Abdul Rahim took charge of the Committee after Sushil Modi and continued till March 2015. After Rahim came Mani, who left in November 2015.

  Mitra’s appointment after a gap of about three months was significant as this was seen as a political gesture from the BJP to the Trinamool Congress, in a bid to win its support for the GST Bill in the Rajya Sabha. Mitra was not at the meeting when the decision to make him the chairman was taken. Finance Minister Jaitley had called Mitra to convey the government’s decision to appoint him the chairman. The move did help as the Trinamool Congress supported the bill in the Rajya Sabha vote on 3 August 2016. After the voting, Mitra said: ‘What would be the level of tax? The idea is to have a tax that does not result in inflationary pressures on the common people . . . The rate should be such that it is neither too low nor too high.’ Months later when the GST Council was busy deciding the rate structure for different products and services, the Trinamool Congress was no longer happy with the GST idea and Mitra began expressing serious reservations about many of the provisions in the GST.

  In the run-up to the crucial Rajya Sabha session where voting on the 122nd Constitution Amendment Bill on GST was to take place, the government made a few more politically astute moves. It convened an Inter-State Council meeting in New Delhi on 16 July, where chief ministers of almost all the states were present. Prime Minister Narendra Modi used this opportunity to engage with the regional party leaders on the sidelines of the meeting and seek their support for the GST. A significant headway was made when Nitish Kumar, chief minister of Bihar, decided to extend the support of his party, Janata Dal (United) to the bill. ‘The passage of the GST is in the interest of the country. We support GST and have favoured it since the beginning,’ Kumar said on 19 July. Even the Rashtriya Janata Dal, led by Lalu Prasad, decided to support the Constitution Amendment Bill, signalling his party’s break from the Congress on the question of the GST.

  A meeting of the Empowered Committee of State Finance Ministers was held on 26 July and it looked as if Jaitley had succeeded in garnering adequate support from the regional parties. The All India Anna Dravida Munnetra Kazhagam (AIADMK) continued to remain opposed to the GST. But even AIADMK agreed not to oppose the bill in the Rajya Sabha and indicated that it would stage a walkout from the house at the time of voting, which is what it did on 3 August. It was a politically astute move from AIADMK. It registered its protests against the GST by staging a walkout. And yet the walkout helped the government secure the much-needed two-thirds of the votes of members present in the Rajya Sabha, since it was a Constitution Amendment Bill. It is ironical that one of India’s most fundamental taxation policy changes was facilitated by some astute lobbying by the ruling party and a politically cynical step from the AIADMK—on paper it showed its disapproval by walking out of the Rajya Sabha, but in effect it helped the government usher in the GST.

  With a few Congress-ruled states now veering round to the view that the GST Bill was not a bad idea, the BJP leadership decided to initiate its next move. Of the three demands, the Congress raised, it agreed to accept two of them—it proposed to abolish the 1 per cent extra tax on interstate supplies, thereby rejecting the demands of manufacturing BJP-ruled states like Maharashtra and Gujarat, and it decided to set up a dispute settlement body in which states would have greater say. Politically, dropping the 1 per cent duty on interstate supplies was a big move as this challenged the arguments that had been put forward by manufacturing states like Maharashtra and Gujarat. Yet, in a bid to win the Congress support, Jaitley went ahead with these two amendments. There was a third amendment as well and this was aimed at reassuring the states that the GST rates to be decided by the Council would be governed by the principle of not allowing states to incur revenue losses on the one hand and hurting consumers on the other.

 
In about a month from the passing of the Constitution Amendment Bill in the Rajya Sabha, the Modi government began expediting the follow-up measures to launch the GST. The amendments made in the Rajya Sabha were sent back to the Lok Sabha, which approved them on 8 August, and in the next one month the government ensured that as many as twenty-three state Assemblies had introduced and approved the amendment to the Constitution for the launch of the GST. This was a crucial requirement. Article 368 of the Indian Constitution mandates that apart from the two houses of Parliament, all amendments to it must also be ratified by at least half of the state legislatures. On 8 September, President Pranab Mukherjee signed on the GST Amendment Bill. Four days later, the Union Cabinet decided to set up the GST Council and its secretariat and ten days later, the first meeting of the Council took place in New Delhi, ushering in a new phase of India’s fiscal federalism.

  India looked all set to usher in the GST from the start of April 2017. Industry and trade began preparing for a major disruption that would take place in the way they would pay taxes on the goods they produced and the services they provided. Consumers were a little wary about the likely impact the new taxation system would have on the prices of products and services. However, such fears were not only exaggerated but also baseless. Since its introduction in France in 1954, about 160 countries have adopted the GST, although in different formats. But in none of them did rising inflation after its launch become a problem. According to GST expert Satya Poddar, inflation was not an issue in Australia, New Zealand, Singapore or China. It was only a topic of discussion in Malaysia before politics got the better of the GST there. There is no doubt that the GST triggers a shift in relative prices as prices of some products go up with higher rates and those of others go down with lower rates. But the overall price index is a weighted average of individual product prices and if the GST reform achieves revenue neutrality, the new taxation regime would also be price index-neutral.