The Rise of Goliath

by AK Bhattacharya

  Yet, there were fears of an inflation spike after the rollout of the GST in almost all the countries where it was introduced. Such fears are fuelled by the consumer perception that prices of some products or services have gone up, ignoring the decline in other products and services where the rates have been lowered. India was no exception. Indeed, concerns over inflation rearing its ugly head would be so strong that later the government would introduce a unique anti-profiteering provision in the GST laws to deter trade and industry from enriching themselves unjustly by not passing on the gains of the GST to customers in the form of lower prices. India’s response too was not very dissimilar to many other countries, where such bodies were also set up to act as a deterrent against any inflationary tendency.

  The BJP government soon set up an anti-profiteering authority to force disgorgement of the excess profit any trader or industry may have made. This was a move that became controversial; it went against the spirit of the GST—eliminating the inspector raj—and brought back fears of harassment by the tax authorities. The only saving grace was that the anti-profiteering authority, set up under the law, had a tenure of only two years after which it would cease to exist. In other words, the government’s logic of introducing the anti-profiteering provisions was to keep a lid on prices in the first two years after the GST launch.

  Between September and the first week of November, the GST Council held as many as four meetings, reflecting the seriousness and speed at which the Union finance ministry and the states got down to the task of framing the rules and setting the rates under the GST. While the first meeting discussed the draft rules of procedures, conduct of business, a timetable for the implementation of the GST, thresholds for exemption, composition for some categories of traders and businesses and a compensation law for states that would lose revenue, the third meeting in October deliberated on the various tax rates on products and services. The fourth meeting of the Council was held on 3 and 4 November 2016 and discussed the GST Network’s preparations and the finalized rate bands. It was at this meeting that the four-band rate structure was adopted—5 per cent, 12 per cent, 18 per cent and 28 per cent. An additional cess of up to 28 per cent was also agreed on at this meeting, to be levied on luxury and sin goods, over and above the GST. The revenues to be collected from the cess were to be used for compensating the states for their revenue losses, based on an assumption that their revenues were growing at 14 per cent annually over the base level of 2014–15.

  The fifth meeting was to be held on 9 and 10 November. However, the Union finance minister took a decision to postpone the meeting that turned out to be very crucial. The minutes of the fourth meeting of the GST Council noted:

  The Chairperson informed that as the Model GST Law was not yet ready, the proposed meeting of the Council on 9-10 November 2016 would not be held. Instead he proposed that the Council could meet on 24-25 November from 3 pm to 8 pm on both days as this would give sufficient time to complete the work on Model GST Law and to present it for the Council’s consideration. The Council agreed to this suggestion.

  Was that postponement deliberate? Available evidence does not make it very clear. It is most likely, as events would prove later, that the finance minister, who was the chairperson of the GST Council, knew that his prime minister would be planning an announcement for demonetization on the evening of 8 November. It is, therefore, reasonable to assume that Jaitley wanted to postpone the next GST Council to another date. What he did not anticipate was that the immediate shock and disruption caused by demonetization would be so huge that a postponement of a fortnight would not be enough to absorb and overcome its impact for even the Council members. Eventually, the next meeting of the GST Council was held on 3 and 4 December in New Delhi. And one of the vocal demands made at that meeting was to postpone the rollout date for the GST and ensure that there were higher compensation for the states since demonetization would surely have resulted in higher revenue losses.

  There was no immediate decision in response to the demand for a postponement of the rollout date for the GST. It was only by the middle of January 2017 that it became clear that meeting the 1 April 2017 deadline for the GST rollout would be impossible. There were demands from within the government and outside for the rollout to be postponed by a year instead of being launched during the middle of a financial year. But four major factors may have tied down the hands of the government in settling for a launch by July 2017. One, the Constitution Amendment legislation paving the way for the rollout of the GST had mandated that the transition should take place not later than August 2017. The Modi government was in a bind. Two, there was a view that postponing the GST rollout any further and seeking another extension from Parliament for it would mean a loss of momentum and India’s tryst with the GST could be deferred indefinitely. Three, there was a strong political reason for the government to rush with the rollout of the GST before the one-year deadline set by the amended law. Delaying it till 1 April 2018 would bring it much too close to the general elections of 2019. The government for good political reasons was not willing to face the instability and disruption that the launch of the GST would, in any case, unleash so close to the next general elections. There was a fourth factor that came in the way of postponing the launch of the GST by a year. The internal view in the finance ministry was that if the GST could not be launched in 2017, it was likely that it would not be launched in the near future. And the BJP government was very clear that it must carry the credit of having launched the GST as a badge of honour for its tenure at the Centre. Thus, the new date for launching the GST was going to be 1 July 2017.

  Between December 2016 and July 2017, several meetings of the GST Council were held. The idea of an e-way bill system was discussed in March 2017 to electronically monitor and track the shipment and transportation of goods once they left the factory gates and reached the point of final sale. It did not find any favour at the eleventh meeting of the Council on 4 March 2017, but as the problem of revenue leakage became a big threat for compliance and coverage, the government introduced a modified version of e-way bills from the middle of 2018. Initial dislocation and problems over the e-way bills were there, but soon the trade and industry got used to the idea of being monitored and tracked as the loopholes in the taxation system were being plugged with the launch of the GST.

  By March 2017, all the four GST Bills for rolling out the central GST law, the integrated GST law, the Union Territories GST law and the GST compensation law were cleared by the Cabinet and became laws by 29 March after they were passed by the Lok Sabha as money bills. According to India’s parliamentary procedures, a money bill does not need to be passed by Rajya Sabha and the approval of Lok Sabha alone is adequate for the bill to become an act of Parliament. This meant that there was no need for securing the Rajya Sabha’s concurrence on the four GST Bills. Thus, on 12 April 2017, the President gave his assent to the four GST laws. Simultaneously, the process of getting the law on state GST passed by each of the states began in right earnest. This process took some time, but even here by 21 June, all the states had passed the state GST laws except Jammu and Kashmir, which too passed the law a few days later and, therefore, joined the GST regime later than the national rollout of GST on 1 July 2017.

  An important meeting of the GST Council took place in the third week of May 2017. This was the fourteenth meeting of the Council and it was here that the blueprint for the tax slabs of zero per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent were finalized and the fitment of various product groups—about 1200 of them, under those different rates—was discussed. At that point, over 80 per cent of the goods were either exempted with a nil rate or found themselves in the 5 per cent slab, addressing the fears of inflation arising out of the launch of the GST. A similar slab structure of 5, 12, 18 and 28 per cent tax was approved for services as well. The Council also approved the GST compensation cess amount also at this meeting. This was a big relief. The Centre had already promised the states that it would
compensate them in the event of their suffering any revenue loss. The compensation cess rates had to be in place so that there was no fiscal uncertainty in making good the revenue shortfall the states might suffer. Trade and industry were also given the leeway of filing delayed returns under the GST for the next couple of months. In the subsequent months, many more such relaxations would be announced, but the government took care to reassure trade and industry that it would be most accommodative in its approach, facilitating what by all indications seemed to be a difficult transition to the GST.

  A final hurdle arose when the initial trials with the GST Network showed that the system was not robust enough to take the load of millions of taxpayers filing their returns or uploading their documents within a given day. Attempts were made to persuade traders and businesses not to wait for the last date for filing the returns. But such exhortations made little impact as human behaviour was difficult to change at short notice. The government on its part had taken a decision as early as in September 2015 to award the contract for running the GST Network to information technology giant Infosys for a period of five years. The size of the contract was estimated then at Rs 1380 crore. While the GST Network officials were engaging with the Infosys to remove the bugs and glitches coming in the way of a smooth rollout of the technical system to support the GST, an unexpected drama unfolded at the finance ministry level. Senior Infosys officials explored the idea with the ministry if the launch of the GST could be postponed by some time so that it got more time to fix the problem. However, the finance ministry did not agree to any postponement and Infosys was persuaded to get the software readied before the launch of the GST on 1 July. Partly for this reason and partly because of the inherent complexities in the new online tax system, there were many glitches, problems and disruptions in the filing of returns, uploading of documents and even payment of taxes for several months after July 2017. But over the months, the system stabilized and the earlier blues got over without much long-term damage. The system stabilized primarily because the compliance procedures were curtailed and simplified. For instance, the requirement of invoice matching was dispensed with and a revised online system of matching was tried on a pilot basis after twenty-one months of the GST rollout. The real problem, according to Poddar, arose not from the procedures, but from a flawed structural design that laid more emphasis on somehow implementing the new tax system instead of reforming it.

  By now Modi was clear that he must make the GST rollout a marquee event for his government. He wanted to show to everybody that he had succeeded where previous governments failed. But the Opposition political parties were not ready to play ball and decided to be the spoilsport. Thus, when the midnight event on the night of 30 June at Central Hall of Parliament was planned, Trinamool Congress leader Mamata Banerjee announced just two days before the event that her party would skip the event. The Congress and Left political parties too decided not to attend the inauguration of the GST at Central Hall. President Pranab Mukherjee was perhaps the only leader from the entire Congress party who graced the occasion. He had little option since as the President, technically it was his government which was launching the GST. Finance Minister Arun Jaitley recounted the long journey of the GST and showed magnanimity and grace by giving the credit for the launch of the new indirect taxes regime to the collective efforts of several governments of the past. Modi’s speech had a different tone.

  When Prime Minister Narendra Modi delivered his address to launch the GST at a midnight function on 30 June 2017 at the Central Hall of Parliament, the symbolism of his act was evident to everyone. Only twice since Independence had the Central Hall been the venue for a midnight function—once on the night of 14 August 1947 when the country’s first prime minister, Jawaharlal Nehru, delivered the famous ‘Tryst with Destiny’ speech and the second time was in 1997 when the then Prime Minister, Inder Kumar Gujral, marked the fiftieth anniversary of India’s Independence with his address. By using the Central Hall of Parliament and choosing midnight for the launch of the GST, Modi was showing the significance he was attaching to his government’s indirect tax reform initiative. Referring to past instances of the use of the Central Hall to celebrate the country gaining freedom or adopting the Constitution, Modi said: ‘Several years later, this House shall once again go down in the annals of history as there couldn’t have been a more anointed venue than this for the launch of one of the biggest strengths of our federal structure—the GST reform.’

  Modi cited a few salient point of the GST which deserve to be recounted here. He talked about the unification of many taxes into a single tax system. Indeed, as many as seventeen central and state-level taxes were subsumed in the GST. He talked about how consumers as also the investors would have the comfort of a uniformity of the tax system across the country and wouldn’t have to wrestle with different tax regimes in different states. He talked about a new culture of governance where tax terrorism and the inspector raj would be a thing of the past. He talked about how technology would be used to administer the GST system and announced that the GST was also about making India digital. He was conscious of the disruption it would cause and urged everyone to give the new taxation system some time before it settled down and benefits started flowing from it. ‘I request those who have fears to dismiss them. You get your eye check-up done by your regular doctor. He gives you power for your eyes. You get spectacles made. When you get those spectacles, it takes two-three days to get adjusted. The crux of the story is that even then the eyes need to adjust to new spectacles.’ Modi’s tone was different. The exuberance that he had displayed while announcing demonetization a few months ago was missing. Modi was urging trade and industry to cooperate and adjust to the idea of a new system that he believed was superior to the existing one.

  Little did one notice then that Modi as prime minister was embracing yet another scheme that the previous government had launched. Already, he had adopted the Aadhaar, a biometrics-based unique identity system, which was launched by the Manmohan Singh government. And now he was doing something similar with the GST. As prime minister, he shed all his opposition to the GST he had voiced as the chief minister of Gujarat some years ago. Not only that, he took necessary steps so that his government could own up the new tax system so completely that it would be closely identified with his regime.

  CHAPTER 26

  THE AFTERMATH OF THE GST

  The launch of the GST altered the indirect tax space in India quite dramatically in a way that was never seen before. Such disruptions do not happen very often. The number of business establishments that got registered within the first few months of the launch of GST showed broad acceptance of the scheme. Just five months after the GST rollout, the number of unique entities registered with the GST rose to 9.8 million. Of this, only 6.4 million establishments were registered earlier either for state VAT (5.8 million) or for service tax (0.6 million) or for central excise (0.01 million). In other words, less than half a year after the launch of the GST, the country saw an increase in the indirect taxpayers’ base by almost 50 per cent, or 3.4 million establishments. And the coverage increased after the threshold was kept at Rs 20 lakh annual turnover. For state VAT, this meant the threshold was raised from Rs 10 lakh to Rs 20 lakh, and for excise, the threshold was lowered from Rs 1.5 crore to Rs 20 lakh.

  It is true that almost 1.6 million registered establishments under the GST had opted for the composition scheme, which essentially allowed them to pay a flat rate of taxes at fixed rates of 1 per cent, 2 per cent or 5 per cent without claiming any input tax credit and running the risk plugging themselves out of the supply chain of larger manufacturers or suppliers who would obviously find it a disincentive to engage in business with them. Establishments with a turnover of up to Rs 1.5 crore were only allowed to avail themselves of the composition scheme. It is also true that almost 65 per cent of the registered entities were just filing returns, but not paying any taxes. Thus, the government’s GST revenues have not been positively impacted by
the increase in registrations. But the bigger gain is that a long-term source of revenue has been created and tax coverage has increased which could over time lead to greater tax compliance. Of course, any improvement in compliance would be critically dependent on further digitization of the tax administration, which automatically leads to efficient and effective monitoring of taxable transactions. The other source of improved compliance was the dual GST system, as a result of which the assessment exercise happened at three layers—the Centre, states and the taxpayers—reducing the scope for collusion between taxpayers and the tax administration. ‘Collusion is nearly impossible when there are three parties that take part in the assessment process,’ said Poddar.1

  The Economic Survey for 2017–18 pointed out another positive disruption of the GST. It noted that as many as 1.7 million establishments registering themselves for the GST were below the threshold limit of Rs 20 lakh. They were not obliged to register with the GST Network under the rules. Yet, they volunteered to do so because they wanted to be part of the GST value chain and take advantage of the business opportunities that this would generate. Similarly, there were about 1.9 million establishments which could have registered for the composition scheme because of their turnover threshold but chose not to do so. The Survey’s conclusion was that the GST regime had clearly wooed them into its network.