The Good and Services Tax (GST) Council is likely to raise rates to increase collections and to meet the compensation needs of states. The council at its meeting on December 18 may consider the recommendations of a panel of senior tax officers.
The meeting will weigh various measures to boost revenue collection, including the review of the tax structure, compensation cess rates and exempted items.
In an exclusive interview with CNBC-TV18, former chief statistician Pronab Sen and eminent economist and former finance minister of Jammu and Kashmir Haseeb Drabu said an increase in the GST rate at this point could be disruptive as it would add to existing demand crunch.
“One should not change the rate on the basis of the level of economic activity for GST at this point of time when you are still in a transition phase. You have still not completed the whole regime change. If you start changing rates, you are changing the virtue of architecture of the GST in relation to the level of economic activity. That is not what the GST is supposed to be in any which way,” Drabu observed.
The bulk of the GST collection are in intermediates goods. According to Sen, in the case of intermediates, the Centre has advantages in collections. “There is a problem that has to be fixed at both ends and the problem is not one of the rates but it is one of administrative efficiency,” he stated.
Edited excerpts from the interview:
What is your sense, if the goods and services tax (GST) rates were to rise, what happens to the economy? Are we likely to get even below 5 percent in terms of gross domestic product (GDP)? Sen: The rate that we are talking about, particularly the 6 percent rate, is not a very good idea at this stage. However, in any case, we were expecting over time a reduction in the bandwidth of the GST rates and this would be a part of it. So in itself it does not disturb me very much.
However, the 6 percent is applied to what are considered to be necessities. They are the items of common consumption, which are hurting in any case today. So an increase in the GST rate at this point may be a little disruptive. Under more normal circumstances, I would not have bothered about it at all.
That is precisely the point. Because these are not normal circumstances, because this is a time where we have seen the personal final consumption expenditure (PFCE) decline so much, therefore I am asking you if this is going to mean a further demand crunch and as well there is at least an optical impact on consumer price index (CPI). So does it lead to a policy issue because after all the governor clearly said that I want to see the next budget before the next cut. So if optically telecom tariffs go up and some necessities also go up, we could be looking at a 5.5 percent CPI for a goodish bit. How does all this play out for the next six months? Sen: As far as the consumer price index (CPI) is concerned, we need to get into the mode of factoring out tax effect. It is not a good idea to have tax effects as a part of the CPI because these are one-offs, they are not trendsetters. So one should simply adjust for that. I would not worry too much about the CPI at the moment.
I am much more worried about the fact that PFCE is down; now if you raise the middle rate, I would have worried less. However, what you are doing is raising the lower rates, which means that precisely those segments of the society which are having a hard time buying their necessities even today, are going to be hit even harder.
So your advice would be raise 12 percent to 15 percent and raise the 18 percent to 20 percent, no problem, but do not raise the 5 percent to 8 percent? Sen: Yes, do not raise the 5 percent rate to 8 percent. What are your own thoughts, if the rates go up, what would the impact be on growth and do you think the states will take it at all. Don’t you see the states go up in arms because of this whole issue of raising the rates? Drabu: I will go along with Sen in terms of the impact. However, what I want to highlight is, one should not change the rate on the basis of the level of economic activity for GST at this point of time when you are still in a transition phase, you have still not completed the whole regime change. If you start changing rates, you are changing the virtue of architecture of the GST in relation to the level of economic activity. That is not what the GST is supposed to be in any which way.
In fact, are we now looking at changing rate bands? I thought the best way to do it if at all would be to collapse that band and take it to three levels, what was the original idea where you go to 14-14.5 and basically reclassify commodities rather than make rate changes. As it is, there has been 1,200 changes that have happened in the past three or four months. So, it is now becoming a real issue when the original advantage of having how it was done is being diluted and this is becoming a problem.
For the first time I heard somewhere last week in Delhi that people are now saying that kill GST. So, this is now getting into another zone which was not expected. I would think that the way it was designed was that you would have reclassified commodities in these bands.
My bigger problem is will there be a longish bit of just skirmishes -- the Kerala finance minister, of course he has always been belligerent, he said that they will even take the central government to the Supreme Court because they promised 14 percent and it was on the basis of that 14 percent increase that the states gave up their right to tax what was their most lucrative item, sales tax. So, reneging on 14 percent is unacceptable according to them. There will be these kinds of arguments. There was a great deal of statesmanship that Jaitley had shown in getting everyone on board, now in the middle of a downturn and states not having got the money that was due to them in the past six months, are we going to face a period of in action? Drabu: The point is, why are you linking the 14 percent to the rate changes? 14 percent was supposed to be financed through a cess, which is the compensation cess. All that is getting linked. From the kind of buzz that we are getting in terms of recommendations, the compensation cess also may be hiked but everything is on the table. The states are being told that let us increase this kitty so that you don’t fall short, that is why the rate hike has been even proposed. Drabu: What I am saying is that when you go back to origins of it and how it ought to function, rate change should not be done to finance compensation. The whole idea really at that point of time was that you should do it out of cess. So, in principle this is wrong. I am only asking you do you see long skirmishes and no decision for a couple of meetings. Drabu: Yes, I would imagine but I think this is not just restricted to GST Council. What you see adding to the whole thing is the Finance Commission award as and when it starts coming in. So, you will have a period when you will have skirmishes between the Centre and the state. I think we need to go back to the original principle. The real problem is that the GST Council has not functioned as it had in the beginning when the entire architecture was laid out, I think that is the key concern. I want you to come in on the fact that the genesis of this whole problem is that GST collections have fallen short by at least 40 percent of the budgeted estimates, so that is an alarming statistic. How much of that is courtesy the subdued consumption that we have seen and do you think that collections will pick up as the cycle turns and the festive demand, etc. gets recorded? What is your sense of which way things could head? Sen: If you actually think of the way GST works, the bulk of the GST collection are really in intermediates, they are not in final consumption. We do get fair amount from final consumption but particularly at the higher end. However, for the rest the bulk comes from the intermediate goods and services.
Now given that what this is saying in effect is that possibly two things are happening; number one – those which are directly business to consumer (B2C) sales, we may be in a situation where parallel channels of distribution are being set up where GST is simply being ejected. That is a problem that has to be fixed administratively, it is not a rate change issue. In a sense, I am not very aware of whether or not the state governments which were responsible for collecting sales tax – whether they have diluted their sales tax force because they are the only ones who can operate at the B2C level. The central government does not have the wherewithal to do it.
As far as intermediate goods are concerned that is almost entirely in the domain of the Centre. That is where the Centre has advantages in collections. There is a problem that has to be fixed at both ends and the problem is not one of the rates but it is one of administrative efficiency.
At a time when the government is short on cash and it is not giving the money to the states, who are the people who actually spend money, are we getting out of this 5 percent rut anytime soon? Or are we going to see further troughing of the economy before it picks up? Sen: You don’t get out of a consumption or a demand side slowdown by raising taxes, that is about the worst economics that I can think off. Even a third-year BA student will tell you that it sounds wrong. If the real issue is really GST evasion and that has to be fixed, how do you think the monitoring tools can be strengthened hereon and what do you think the next course of action could be? Drabu: There was a huge administrative structure which had been created where sharing of the implementation responsibilities were divided between Centre and states. However please remember that it is a self-assessment system. So, you have to give it time for it to develop. Now you need to look at what ways are being used to avoid it but this whole issue which Pronab Sen is raising about the sales tax force, the whole idea was to move away from that kind of a thing to a regulated and risk-based assessment thing. So, it was meant to be self-assessed and a move away from this whole police-type actions by the sales tax departments of the states. However, I also feel that it is a wrong way to say that states are not making efforts because 14 percent is guaranteed. States on their own do actually make efforts to raise their own taxes, nobody wants to kind of get things from the Centre as freebies. So, that is a wrong impression that gets created all the time.