Not budgeting for GST

he finance minister missed an opportunity to spell out the government’s views on its design.

The maiden budget of Finance Minister Arun Jaitley was presented amidst high expectations. After all, a decisive election mandate is always considered crucial to execute an economic rebound. However, such great expectations cannot be matched by a budget and what is possible for it to deliver, given that it is a short-term document. Given this limitation, the budget has excellently attempted to tackle the issues of an ailing economy inherited from the past government.

This budget aims to achieve three objectives: attaining a high growth rate for the economy, controlling inflation and achieving fiscal consolidation. To fulfil these objectives, Jaitley’s budget has followed the path of uplifting the economy in the short term and giving it direction in the long term.

The first priority of the budget is, therefore, to take steps to gradually repair and revive the economy so that it has the ability to shift to the fast growth-rate track in the medium term. In doing so, this budget makes an attempt to fulfil the expectations of the common man, domestic consumers and foreign investors. The budget provides some tax relief and expects an increase in consumer demand. It puts more money in the hands of the people by raising the exemption limit and the concession on housing loans and small savings.

It also attempts to create stability in the tax regime by suggesting abstinence from making retrospective amendments and proposing to set up a specialised committee in the tax administration to review disputes that have emerged from the Finance Act 2012. Similarly, the proposal to rationalise transfer pricing rules and the introduction of provisions for advance pricing will help in reviving investor sentiment.

The second priority is to boost growth drivers. Agriculture has been accorded high priority. Efforts will be made to develop supply chain linkages, ensure the reorientation of the state Agricultural Produce Market Committee acts to establish private markets, set up a price stabilisation fund and rejuvenate warehousing and cold storage facilities. The UPA flagship scheme, MGNREGA, has also been refurbished to link it to asset creation in the agricultural sector and to avoid waste.

The budget also focuses on various sectors in the short as well as long term. These include defence, infrastructure, health, education, textiles, road construction, food processing and tourism for employment generation through the skill development programme. To provide the requisite investment in some of these sectors, foreign direct investment up to 49 per cent is also proposed to be invited.

Finally, with regard to fiscal consolidation, the budget has

retained the fiscal deficit target at 4.1 per cent of GDP. With this in mind, the effort is to make savings on expenditure, for which an expenditure commission is planned to be set up.

The budget does confirm the intention of the government to get the Goods and Services Tax (GST) implemented at the earliest possible opportunity. In fact, in a TV interview after the presentation of the budget, the finance minister categorically stated that he has already twice met the empowered committee to discuss the concerns of the states. He has also stated that at present, the requisite money is not there for giving compensation for Central Sales Tax loss, but he would find an opportunity in the near future to take care of this aspect. It would have been a great plus if such an intention was reiterated in the budget speech. Further clarity was needed with regard to the concerns of the states, and about how the Centre intended to strike a balance between fiscal autonomy and harmonisation.

Similarly, consensus needs to be built about the design of the GST by taking into account the political economy of a federal democratic country, and the autonomy of its states. The finance minister, in his interview after the presentation of the budget, articulated his views regarding the coverage of the GST. According to him, the best design for the GST might not be introduced but a better one could be put in place even if the states want to exclude petroleum products from its coverage.

In this context, it is important that the Centre hammers in two points. First, there is a need to make the states understand that it would be to their advantage to not exclude petroleum products, even if the GST is not presently levied on these items. Excluding these items from the definition and coverage of the GST in the constitutional amendment bill will not provide any flexibility to levy the GST on these items in future, if and when the states may desire to do so. It would require another constitutional amendment to enable them to levy the GST on those items. What is to be taxed or not taxed, or what the coverage of the GST should be, is better left to the empowered committee or the proposed GST council. The Centre could invite academic think-tanks to make presentations before the empowered committee highlighting the pros and cons of including this in the definition of the GST, even if it is not listed in the present levy of the GST. Alternatively, the government should allow the empowered committee to develop a secretariat of its own to provide rigorous information and well thought-out analysis of the GST. This would help in sorting out some of the many issues regarding the design and implementation of the GST.

Second, this has to go hand-in-hand with an undertaking from the Centre that the GST will not be levied on these items, unless the same is cleared by the empowered committee. Itwould, however, have been better if the finance minister had spelt out these aspects in his budget speech.

Thus, the Modi government’s first budget strikes a balance between fiscal consolidation in the short term and a reform agenda to spur inclusive growth in the medium term.