It's been more than a month now since the Rajya Sabha passed the GST Bill with a thumping majority. The Bill remained work in progress for almost a decade before all political parties could arrive at common ground, burring the hatches. Successful implementation of GST is expected to empower states and rein in corruption. However, the mere passage of the Bill wasn't enough to overhaul India's indirect taxation system. The Government has set a deadline of April 01, 2017 to roll out GST. To meet this tough target, the centre and states have slogged out since Rajya Sabha cleared the GST Bill. We have now entered the most crucial phase of India's biggest tax reform. How the centre and states perform in this stage will decide how effective the GST would be indeed.

What's the roadmap to GST now?

To be able to roll out GST on April 01, 2017, the Government has to work in the 3 areas simultaneously.
 

Out of these, the task of establishing a sound legal framework is clearly the toughest of all, primarily because, it may potentially create another deadlock between political parties. Moreover, the states may have conflicting views with the centre. Unless a robust legal framework is laid down, the Government can achieve little success in the remaining two areas. The non-passage of GST Bill was more a political gridlock.

 

Update on the Government's progress on setting up the legal framework...

As you may be aware, President Pranab Mukherjee recently gave a node to the Constitutional Amendment Bill for GST. Following this development, the Finance Ministry notified the provisions of the Constitution Amendment Act, with effect from September 12, 2016, empowering the centre to set up the GST Council. The GST Council will be headed by the Finance Minister and have state ministers as members. The Constitutional Amendment Act provides that the GST Council must be established within 60 days of its notification. The GST Council is expected to deal with some important aspects such as the tax rates and the establishment of the Dispute Resolution mechanism.
 

Government has cleared 3 levels in an 8-level game

	Steps in establishing the legal framework of GST
1	Passage of the Constitution Amendment Bill by the Parliament
2	Ratification by 50% States
3	Presidential Assent of Constitution Amendment and notification in official Gazette
4	Cabinet Approval for Formation of GST Council
5	Recommendation of Model GST laws by GST Council
6	Cabinet Approval for the CGST and IGST laws by Centre and for SGST laws by ALL states
7	Passage of CGST and IGST laws in the Centre and passage of SGST laws in ALL states
8	Notification of GST Rules

(Source: Ministry of Finance)

The Government has managed to move at a brisk pace so far. When the President provided his assent, nearly 20 States had already ratified GST. However, the efforts of the Government to honour the deadline set to roll out GST are likely to meet some resistance in the future, especially from the Congress Party. According to a CNBC TV-18 report, if their sources are to believed, as per the Finance Ministry estimates the Revenue Neutral Rate (RNR) of 22% would be the most acceptable rate to the states. These speculations gain more weight if you pay attention to what the finance minister of Kerala, a Left ruled state said in an interview to CNBC-TV18. According to him, States are unlikely to accept any rate below 22%. One of the three conditions the Congress party had attached to support GST was the constitutional cap of 18% on tax rates.

The committee headed by the chief economic advisor, Dr Arvind Subramanian, had recommended a two-rate structure—low rate goods and high rate goods, with a standard rate of 17%-18%. In simple words, the committee opined to allowing essential goods and services to be taxed at a rate lower than the standard rate; and luxury goods and services at a rate higher than standard rate. The standard rate is expected to be near the RNR.

On this backdrop, the target of clearing the CGST, IGCST, and SGST in all States in winter session appears ambitious.

Impact of the level of rates on consumers...

A decision on the rate of GST is likely to decide the effectiveness of India's much-discussed tax reform. A high incidence would result in higher inflation, while, a very low rate would mean a huge revenue loss to States. The services that are taxed at a uniform rate of 15% at present will have to be demarcated as "essential" and "luxury". If they are not classified and continued to be charged at a uniform rate, a high incidence would be a double whammy. Services still have a very dominant share in India's GDP. Imagine paying 22% tax on your utility bills

Impact on investors…

Capital markets have already factored in the possibility of 18%-20% of standard rate. Markets and the industry would welcome any rate in the range of 18% to 20%, but anything above that would be a disappointment. On the contrary, higher the revenue loss due to lower rates, greater would be the market borrowing of States and would be a negative for the economy and markets. Higher deficits would endanger the economic growth in several states as they will hold back spending on infrastructure and other developmental projects to strengthen the balance sheet. Social pressure may not allow them to cut back spending on activities that don't generate revenues.

It's a catch-22 situation for the centre and in particular for the GST Council. Anyone who believes that mere formalities are now left in rolling out GST is severely undermining the complexities involved in the process. If you are an investor, you should stay away from any speculation on the tax rate—be it negative or positive.

As a smart investor, focus on your asset allocation to achieve your financial goals rather than the continuous news flow which, most of the time, means nothing more than speculation. So far, the Government hasn't officially indicated anything about the GST rate. .

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Comments
zshahpur@hotmail.com Sep 13, 2016 I don't agree that a lower GST would mean revenue loss for the Central and State Government. Lower tax may instead increase spending and in absolute terms there may not be any revenue loss for the states. In fact a higher tax would make goods and services expensive and would curtail spending. Therefore the contrary holds true in this case.

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