Opinion The silver bullet of reform

More critically,Mukherjee will need the opposition’s cooperation to implement the single biggest reform of India’s political economy — the Goods and Services Tax (GST). It is not for nothing that the PM stated the importance of the GST in his recent press conference. Pranab Mukherjee is a seasoned politician,and is possibly the most qualified person in the Congress to work with the opposition to create a consensus on implementing the GST,which could transform the way India’s economy is organised.

A single GST to be shared by the Centre and states will do away with the current,chaotic structure of cascading local taxes at the state level by collapsing them into a simplified single tax rate on goods and services.

GST is politically sensitive because it tries to reorganise the way taxes are to be collected by the states and the Centre without impinging on the federal powers of a state to levy taxes in areas under its jurisdiction. It is a delicate exercise,and needs someone like Pranab Mukherjee to pull it off. GST was promised by UPA 1 and its implementation was to kick off from April 2011. But under the new time schedule it is to start from April 2012.

So the forthcoming budget will have to lay down the timeframe for achieving various implementation milestones over the next six to nine months. A lot of the UPA’s political capital and energy will be expended on working with the opposition to make GST a reality.

Why is GST so important,you may ask? GST is a bit like a magic bullet which has the potential to solve several long-term problems at one go. It is anti-inflationary,as it considerably reduces indirect taxes at the Central and state levels. Such an anti-inflationary move would be most welcome at a time when inflation is seen as a big political issue. The total incidence of indirect taxes at the Central and state levels is about 24 per cent at present. Under the proposed GST this will go down to 16 per cent by 2014. Goods and services will be that much cheaper. There can’t be a bigger anti-inflationary roadmap. GST will attack black money in a big way,especially in the real-estate sector,which generates the maximum unaccounted wealth. BJP leader L.K. Advani talks about bringing back $500 billion worth of money stashed away by Indians abroad. But,by properly implementing GST,real-estate transactions worth nearly $200 billion annually can be brought under the indirect tax net. Once these become part of the formal economy,income from these activities will be taxed separately. Currently,the government loses both indirect tax as well as income tax from those who benefit from the $200 billion worth of transactions in the real-estate sector.

Today 40 per cent of all revenues earned by the states are from stamp duty levied on real-estate transactions. But the problem is that stamp duty revenue is only a fraction of what the states would actually earn if an extra $200 billion worth of real estate transactions are brought into the tax net every year.

The political significance of this should not be lost on anyone. Once real estate comes into the tax net,the nexus between politics and slush money from real estate can be exposed. So bringing real-estate transactions under GST is the surest way of cleansing Indian politics from its current ills.

In pure budgetary terms,the biggest upside that will come from implementing GST is a sustained boom in revenues over the medium to long term. This is the surest way to not only achieve long-term fiscal consolidation as per the new FRBM roadmap,but also pay for all the new social-sector programmes being devised by the UPA at present.

A review of the Indian economy by the Prime Minister’s Economic Advisory Council released last week says that “the implementation of GST can bring about significant improvement in revenue productivity. The hope of meeting additional resource requirements for food security,increased allocation to education and healthcare will critically depend on the implementation of GST and it therefore is important for both the Central and state governments.”

Therefore,it is evident that the UPA is depending on the GST reform as the prime vehicle driving both fiscal consolidation and its social-sector spending programmes. There can’t be a better win-win solution.

Just to get an idea of how GST would result in an explosion of revenue productivity,one needs to look at just one figure provided by a finance ministry task force which studied the upside the GST reform provides. The task force puts the potential value of transactions on which the Centre and states can collect GST at over Rs 35 lakh crore. At present,probably only 60 per cent of this transaction value is being taxed. The remaining 40 per cent represents a fresh source of revenue as these transactions are outside the tax net. India could really shine when all this black turns white.

The writer is Managing Editor,‘The Financial Express’