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Many GST rates to bring administrative, legal problems: Frmr FM

At the goods and services tax (GST) council meeting all states sat down as equals with the central government to arrive at a structure for the landmark indirect tax reform.

Everyone is in agreement that services tax will be collected entirely by the central government. But the tax on goods will be divided.

States will collect taxes from companies with turnover of less than Rs 1.5 crore and the  centre will collect taxes from companies with more than Rs 1.5 crore.

In today’s edition of Indianomics, former Finance Minister Yashwant Sinha outlined the politics of GST and said that too many GST rates will lead to administrative and legal problems and added that GST should be kept  as simple as possible.

Below is the verbatim transcript of Yashwant Sinha’s interview to Latha Venkatesh on CNBC-TV18.

Q: Let me just layout what my problem is, the GST council is the first constitutional body, where all states have one vote I mean there is equality in Rajya Sabha and Lok Sabha, the vote is based on the population of the state. Now I wanted to know how this will affect the politics of centre-state relations. For instance the Centre has 33 percent of the votes in the council. It needs 19 out of 31 states to vote along with it to get the 75 percent to just bulldoze its way. Do you think the centre will buy up some of the small states and thus just get its way on every issue?

A: It does, there is no doubt about it. The idea in the GST council was not to handover complete powers to the states and the centre could not afford to be a mere bystander.

Therefore, it is important for centre to retain some powers, which will enable it to put the voice of sanity in the GST council, but as far as the politics of the GST council is concerned that from my experience of working with the empowered group of state finance ministers which I had created as you will recall.

My impression was though we were dealing with the state VAT that the states were more concerned with revenue loss or gain of their own state, even the political colour of the government of that state was not an issue, so we had a situation where Madhya Pradesh which was a congress government would come forward and support VAT and the other states which belonged to the BJP would oppose it.

That is the way it works. This is a pure economic principle on which the debate will be based and political complexion of the government in the states I don’t think will matter very much.

Q: We are getting some noises from finance ministers that they want 3 rates. Do you think that would be the way forward, what would your advice be 2 rates, 3 rates or even more?

A: It is with the great deal of effort that we settle for 3 rates when I was finance minister as well as central VAT (CENVAT) was concerned, you will recall that I created a mean rate which was 16 percent, then there was a demerit rate of 24 percent and there was a merit rate of 8 percent and this is the formula on which we have worked.

Now as far as the GST is concerned I personally feel that introduction too many rates will lead to confusion and will lead to administrative problems, will lead to litigation. A producer of every product will say why I am in this category and why not in the lower category and it lead to as I said administrative and legal complications, so I very strongly recommend that there should be only 3 rates.

Of course, there will be an exempt list, but there should be only 3 rates except again I will say that if some of their states are pleading for threshold for presumptive tax, where you will impose 1 or 2 percent and will not go into the details and they will up to a certain turnover of let say Rs 50 lakh just deposit that rate of tax.

Much will depend on discussions with the states on this, but I think its centre’s responsibility to persuade the states to accept 3 basic rates.

Q: How will the tax administration pan out, today after the GST council we heard that service tax is going to be collected only by the centre, but goods tax the work is going to be shared. Will the administration be amicably divided?

A: This is the most important complication in the introduction of GST. How will the tax administration work in on a combined basis, the central tax administration and the tax administration of the state, who will collect what.

My suggestion will be that they should fix a threshold that up to this level the states will collect, beyond that level the centre will collect and ultimately it will be a common pool and it will be distributed to amongst the states in a manner which has already been agreed upon.

Q: That is what they have agreed today but today the states could not agree on the rate of projecting the future growth of GST. Should it be the basis of the last five years, the best three of the last ten years, three median years, do you think this will be amicably resolved?

A: We already have the precedent of government of India agreeing to compensate the states as far as VAT was concerned. We followed the principle of average of three years and we did not take the best or the worst. It was just the average of last three years. So you decide on a number of years over which averages will be calculated and the compensation if it becomes necessary will be paid according to that. But if you take the best years out of the last six or the worst years etc, that will create complications.

Let me make one point to you, it is very important that the whole thing is kept as simple as possible otherwise we will lose the advantage of GST.

Q: Let me look at it from the centre’s angle. States who earn more, keep the extra money. States that lose get compensated. So centre loses anyways.

A: Sure because the experience of VAT would suggest that despite the fact that the cntre promised to compensate the states for revenue loss, it didn’t amount to very much because compliance improved as a result of which the states ended up collecting more revenue than was the case in the past years. So it did not become too much of a burden for the government of India and therefore it is a destination based tax. So states, which are not destinations may tend to lose out but we will have to keep an eye on and I don’t think — we have worked it out earlier in the case of VAT and that same formula it should apply to GST also.

Q: What about agreeing on the standard rate itself? Kerala seems to be okay with 18-20 percent but when we spoke to J&K, they weren’t and they thought that the producing states will be even more obdurate. Do you think this will get resolved by November 22 and at the lower end at the 18-20 percent?

A: This is a mathematical calculation. How much is the combined revenue of the centre and the states, today pre-GST and then you decide a rate or rates, which will be revenue neutral. So there will be a mean rate obviously and when we are talking of 16-18 percent, we are talking of the mean rate under which most of the commodities products will fall.

Suppose you have two-three rates then you can tweak it in such a way that you make sure that if anything — the mean rate is becoming excessive, let us say instead of 18 percent, it is becoming 20-22 percent then you transfer some of the burden to the demerit rate — instead of 24 percent, make it 30 percent so that the overall package is revenue neutral.

Q: Federal countries be it the United States or India have shown a centralising tendency, will the GST be another factor that will end up strengthening the centre at the expense of the states?

A: I don’t think so. In fact, it will on the other hand militate against centralisation and work for a real federation because as we said in the beginning, the GST council has a constitutional position and the council cannot be ignored, the consensus in the council cannot be ignored and the consensus will not be torpedoed only because the centre has 33 percent.

So that is a very important — cooperative federalism will have to be on its best display in the GST council and no finance minister of India now or any finance minister of the state can take the constitutional arrangement for a right.