Goods and Services Tax Bill

P chidambaram Tue, 23 Aug 2016

Goods and Services Tax Bill

Excerpts from the speech of Shri P Chidambaram during the debate on the 122ndv Amendment Bill- GST on 3rd August 2016 in Rajya Sabha Shri P.Chidambaram (Maharashtra): Mr. Deputy Chairman, I am happy to be able to speak in this House once again. I do so, for the first time, on this side of the isle and that makes me doubly happy. I welcome the friendly and conciliatory tone of the hon’ble Finance Minister’s speech. I think, the tone and approach has changed over the last three or four weeks, and that augurs well for this Bill. Although it will depend upon the outcome of this debate; and the assurances that the Government is able to give, on many issues, which he himself hinted, are still outstanding issues and that need to be resolved. If I may say in the lighter vein, between 2011-14, I did virtually, what called, “Chardham” was travelling between my Prime Minister, the Leader of the Opposition in the Lok Sabha, the Leader of the Opposition in Rajya Sabha and the Empowered Council of State Finance Ministers’. We tried to pass the GST Bill with the support of the principal Opposition party and we failed. In the last 18 months, the Government tried to pass it without the support of the principal Opposition party, and I am glad that you have also failed. Today, if we pass the Bill, which I hope you will, after we listen to your speech, it will be on the basis of serious discussions, serious negotiations and serious debate. It is far too important legislation to be passed on a partisan basis. In fact, I commented once, I hope the Finance Minister will pass the bill not on the strength of numbers, but on the strength of his arguments. Sir, I am glad that the finance Minister has acknowledged that it was the UPA Government which first officially announced the Government’s intention to bring about the GST. On the 28th February, 2005 it was announced in the Lok Sabha in the course of the Budget Speech, I quote: “In the medium to long term, it is my goal that the entire production and distribution chain should be covered by a national VAT or even better a goods and services tax encompassing both the Centre and the States.” It has, of course, taken us 11 years to arrive at this point. But I think the journey has been a learning experience for everyone.

Sir, let me make it very clear that the Congress Party was never opposed to the idea of a GST. In fact, I believe, about an hour ago, the Finance Minister said so much in an interview to a television channel, and I thank him for making
that acknowledgement. We were never opposed to the idea of a GST. We are not discussing or debating the idea of a GST. That debate has gone on in this country for several years, and I think the country is now ready to embrace the idea of a GST. Just as the 2011 GST Bill, introduced by Mr. Mukherjee, was opposed by several Parties including the BJP, the 2014 Bill is being opposed. The idea was not opposed; the Bill was opposed because we felt that it was possible to have a more perfect Bill. And I choose my words carefully. There can be no such thing as a perfect Bill. And in a legislation as transformative and as revolutionary as the Goods and Services Tax Bill, I don’t think anyone from the Government side will claim that this is a perfect Bill. It can never be a perfect Bill. But when we found that there were too many flaws in the Bill, and many of those flaws could be fixed by addressing them seriously, we decided that we could support the Bill. I am happy that in the last few weeks there has been a serious engagement by the Government with the Opposition Parties, including my Party, and I am glad that considerable progress has been made. Sir, there are four major issues. I will
touch briefly upon the first three issues because it is the last issue that concerns me the most and I want to take my time dealing with that at some length. The first one is this. I wish to point out to the hon’ble Finance Minister, that there are still pieces of clumsy drafting in this Bill. For example, in the present List of Amendments circulated, you have made some provisions for what will go into the Consolidated Fund of India and what will not go. This problem should have been noticed much earlier. It should have come in the Draft Bill. But it has come today in the form of an amendment, and while I will not take too much time explaining what I have in mind, if the hon. Finance Minister reads it more carefully, he will find that these are exquisite pieces of clumsy drafting. Revenue has to go into a Consolidated Fund. That is the mandate of Article 266 of the Constitution. It has to either go into the Consolidated Fund of India or the Consolidated Fund of a State. It cannot go nowhere, and I am afraid the draft amendment circulated leaves this question unanswered. I can understand the problem that you faced. I think, to the best of my understanding, the problem was how to avoid double counting. But I think there was a more elegant way of dealing with the problem of double-counting. I think the draft is clumsy. Maybe, it can’t be rectified at this stage when we are in the final stages of debating the Bill. But I would just add a word of caution that the drafting in this respect is rather clumsy.

The second issue was, I think, an issue that could have resolved in five minutes. How can you in a destination-based tax have a retrograde provision like some States being allowed to impose an additional one per cent? What is the rationale of a GST? The rationale of a GST is that we must avoid multiplicity of taxes; we must avoid cascading of taxes and we must be able to capture every taxable transaction. If you give to some States the power to impose an additional one per cent tax, and in the Bill that was circulated, it could have been imposed by more than one State as goods pass from State ‘A’ to State ‘B’, to State ‘C’ and to State ‘D’, it would have led to multiplicity of tax rates, it would have led to cascading, and it would have led to a situation where several transactions may or may not be captured. This was immediately pointed out, but, I think, the Government was, during that time, not today, rather stubborn. The Chief Economic Adviser of the Government pointed out that this was a retrograde provision, and this should be scrapped, and I am happy that this has been scrapped. GST does not stand only for goods and services tax, it also stands for good sense triumphs. Ultimately, for good sense triumphs, you have dropped the one per cent tax and I thank you for accepting our suggestion to drop the one per cent tax. The second major issue is dispute resolution. Now, please remember that dispute resolution between the Centre and States, between one State and one or more States, between a group of States and a group of States, is not a matter on which the Constitution is silent. Whatever we do here, we must acknowledge the fact that the Constitution is not silent on dispute resolution between States. Article 131 speaks loud and clear. It provides for a machinery for dispute resolution.


Nothing that we do here can derogate from Article 131 unless you amend Article 131, and that is not what we are doing today, which is why the Bill introduced by Mr. Mukherjee in 2011, laid out a clear provision for dispute resolution called the Dispute Resolution Authority, and recognized that dispute resolution is an exercise of judicial power. Just as the Government is jealous of guarding its Executive power, just as we in Parliament are jealous of guarding our Legislative power, the judges of this country are jealous about guarding their Judicial power. Time and again, the judges have said, if you encroach upon our judicial power, we will strike it down. I still maintain that the provision introduced in Mr. Mukherjee’s Bill was the best provision, or clearly a much better provision than the provision introduced in the present Bill. The draft circulated was abominably deficient. It did not even require the GST Council to establish a mechanism. It says ‘may lay down the modalities’, and in discussions with us, and I believe, discussions with other parties, it was pointed out to the Government that this is hopelessly deficient. You must oblige the GST Council to set up a Dispute Resolution Authority, and it must be set up ex ante. A mechanism cannot be set up after the dispute arises; that is the difference between rule of law and rule by law. In a country governed by rule of law, the Dispute Resolution Authority is known to everybody even before a dispute arises so that you know if a dispute arises; you go there. If you set up the machinery after the dispute, that is not rule of law. That is, show me the person and I will show you the rule. I am glad that some strengthening has been done to this provision. I would still urge the Finance Minister if he is inclined to do that, to strengthen it, there is still time to strengthen, during the course of this debate, he can move an official amendment. I would still urge him to say that the clause which he is introducing now, namely, Amendment No. 7 to Clause 12, can be strengthened. It only contemplates, ‘disputes arising out of the recommendations of the GST Council’. I think he should add, ‘disputes arising otherwise also between States’, and in the first part of recommendations of the GST Council’.


Sir, I now come to the more important part of this Bill, which is, the heart of the Bill, the core of the Bill. This is about the rate of tax. I will presently read portions from the Chief Economic Advisor’s Report. The heart of this Bill is what the tax will be. It is not a matter between the Union Finance Minister and the State Finance Ministers. There is a third line to the triangle; that is the people of this country.

Every Union Finance Minister wants to maximize revenues. Every State Finance Minister is under pressure to maximize revenues. There is nothing wrong with that. But, please remember we are dealing with an indirect tax. An indirect tax, by definition, is a regressive tax. Any indirect tax falls equally on the rich and poor. If you buy a soft drink bottle; whether a rich buys it or a poor man buys it, he pays the same excise duty on the soft drink bottle. That is why, world over, indirect taxes, being regressive in nature, the trend is to keep them as low as possible. I am sure many Members have read the Chief Economic Advisor’s Report. If not, I would urge you to please read it. The cover tells the story. “In high income countries, the average GST rate is 16.8 per cent. In emerging market economies like India, the average is 14.1 per cent.” So, world over, over 190 countries have one form or the other of GST. It is between 14.1 per cent and 16.8 per cent. The idea is, being an indirect tax, it should be kept as low as possible. The taxes that fall more on the rich and less on the poor are income tax and corporate tax. Those are the taxes consistent with other goals which the country may have. Those are the taxes which must be of principal sources of revenue. In fact, for many-many years in this country, there is a complete tax distortion. The collection from indirect taxes is larger than the collection from direct taxes. I think we crossed the line some time in the year 2006 or 2007. Maybe in 2008, we crossed the line when the collection from direct taxes overtook the collection from indirect taxes and that remain so even today and that is how it should be. In fact, the collection from direct taxes should far outweigh the collection from indirect taxes. So, what do we do? We need to keep the taxes low. At the same time, we must protect the existing revenues of the Union Government and the State Government. So, how do we go about it? We go about it by discovering what is called a Revenue Neutral Rate, RNR. That is not the actual rate of tax. That is simply a step in deciding the slab rates. It is not so technical. In fact, it can be explained in fairly simple terms. You derive an RNR; and then from that RNR, you work out the slab rates.

Suppose you derive the RNR as ‘x’, the slab rates will be x (-) will be the first slab; ‘x’ will be the second slab; and ‘x’(+) will be the third slab. ‘x’(-) will fall on goods of mass consumption, what we call wage goods, goods that are consumed by the poor people. ‘x’ will be the standard rate or nodal  rate. ‘x’(+) will fall on what is called ‘demerit goods’ or sin goods, the so-called sin goods like alcohol, tobacco, imported luxury cars, etc.,

It is perfectly a balanced structure. The question is: What is ‘x’? Today, please remember, over 80 per cent of Excise Duties are between 12 and 14 per cent. Over 56 per cent of VAT is in the range of about 13-14 per cent. So, on an average, 70 per cent of the goods have a tax incidence of about 13-14 per cent. But there are huge tax losses because of an inefficient collection machinery and a large number of goods escape taxes. They are neither captured by the Union nor captured by the States, etc., etc. The GST is supposed to be a more efficient tax. If the Union captures it, it cannot escape State tax. If the State captures it, it cannot escape Union tax. Therefore, it is more efficient. And because it is non-cascading, more people will comply with it. Because it is a selfaudit method, a chain of transactions, it is very difficult to escape the tax. All these are argued everywhere, and I don’t wish to repeat those arguments. Now, the Chief Economic Adviser of the Government, working with experts, including State Government representatives, arrived at an RNR of 15 to 15.5. And, then, suggested that the standard rate should be 18. The Congress Party did not pluck 18 from the air. This 18 came out of your report; the standard rate must be 18. You can have then a lower rate 18(-), and you can have a demerit rate 18(+). But the standard rate, the rate that will apply to most groups and most services must be 18, and the Chief Economic Adviser has argued very cogently that that alone will make it non-inflationary, acceptable to the public and an efficient way of taxing without tax evasion. Now, when we say, ‘cap the tax rate’, what are we saying? We are saying that this rate should not be changed by the whim of the Executive. Today Excise Duties are changed by the whim of the Executive. Three days ago, they reduced the price of petrol and diesel. Three days later, they increased the price of petrol and diesel. They do not come to Parliament for approval.

The Customs Duties are changed by the whim of the Executive. But the Income-tax cannot be changed by the whim of the Executive because it is enshrined in the law. Therefore, we argued, please now, on the basis of your own reports, cap the rate. When we used the word ‘cap the rate’, what do we mean? It cannot be changed by the whim of the Executive. A rate must only be changed with the approval of Parliament. Now, I ask all of you; Do you agree with me or do you disagree with me on the question that a rate of this importance must be changed only with the approval of Parliament?

It cannot, ought not to be changed by the whim of the Executive. Now, I want to speak up loud and clear and tell the people of India that we don’t want Parliament to change the rate; we want the Executive to change the rate. The people of India expect low Indirect Taxes. There are a lot of people, a lot of corporates, I have seen in the last few days, speak up of passing the GST Bill. It does not matter to them whether the rate is 18 or 20; they will pass it on to the consumer. In any way, there are many voices in the country to speak up for the corporate supporters. But, somebody must speak up for the people. That is precisely what my party is doing, what I am doing today. In the name of the people, I ask you to keep this rate at the rate recommended by your CEA, namely, the standard rate should not exceed 18 per cent. I know, you are not incorporating it in the Constitution Amendment Bill. But, willy-nilly, you have to incorporate it in the GST Bill. No tax Bill will survive judicial scrutiny unless the tax rate is mentioned. So, today, you may avoid mentioning of it, but three months later, when you come back with the GST Bill, the CGST Bill and the IGST— now called Goods and Services Tax on Inter- State Trade and Commerce— must mention a tax rate. And we will repeat this demand again then. In the meanwhile, we will campaign throughout the country appealing to the people of India to support the idea that this tax, the standard rate of GST, should not exceed 18 per cent. With the greatest respect, I don’t buy the argument that by fixing the standard rate at 18 per cent the States will lose revenue. Sir, just read paragraphs 29, 30, 52 and 53 of this Report. It categorically argues on sound data that a rate which is the standard rate, which is based on implied RNR 15 to 15.5, a standard rate of 18 per cent, will protect the revenues of the Centre and States, will be efficient, will be noninflationary, will avoid tax evasion and will be acceptable to the people of India. However, if the Government does not care about inflation, does not care about acceptability to the people of India, does not care about efficiency, then go ahead and charge 24 per cent or charge 26 per cent! That is defeating the purpose of GST. If you are going to charge 24 or 26 per cent ultimately on goods and services, why bring a GST Bill at all? Your Excise and Customs will take care of it. Please remember, services today represent 57 per cent of India’s GDP. It suffers a tax rate of 14 per cent today. With Swachh Bharat cess and other cess, it may have gone up to 14.5 per cent. But, if you suddenly jack it up to something like 24 per cent, it is hugely inflationary. Let me caution you, let me go on record, it is hugely inflationary and there will be a huge backlash if you raise the service tax rate from the current 14.5 per cent to 23 or 24 per cent. Sir, likewise, in VAT, most goods suffer a very low rate of VAT. There is a huge number of exemptions and only 56 per cent are of the standard rate. If you suddenly jack it up to 23 or 24 per cent, it will be inflationary. And a high rate will lead to tax evasion. A high rate will mean an inefficient system. So, I would urge the Government to reflect on it again. Yes, we have today agreed because I believe, even the Government has not made up its mind on what the RNR is. The Government and the State Ministers are not agreeable on what the RNR is. In the last meeting that took place the last Tuesday, according to our information, there was a clear cleavage, a disagreement between the State Finance Ministers on the one side and the Union Finance Minister on the other. I can’t vouchsafe that they have not agreed on RNR. They are going back to their drawing board and work on the RNR. I don’t know. Perhaps, within the Government, there is a disagreement between the Revenue Department and the Economics Division. I don’t know either. Eventually, you will have to come to an agreement on this point. Eventually, you have to put a rate in a tax Bill. I, on behalf of my party, loudly and clearly demand that the standard rate of GST which applies to most of the goods and services, over 70 per cent of goods and services, should not exceed 18 per cent and the lower rate and the demerit rate can be worked on that 18 per cent. Sir, the worry that we have is creeping taxation. Every Government is being guilty of creeping taxation, including mine. I am not denying that, but that is precisely what Parliament is for. Taxation is the exclusive power of Parliament. It should remain the exclusive power of Parliament. We can give some flexibility to the Executive, but eventually, it is Parliament which must call the shots on what the rate is. That is why I appeal to you that
while today we may not put the rate in the Constitution (Amendment) Bill, tomorrow when the Bill comes, the rate has to be mentioned and we will, in the meanwhile, campaign and persuade all political parties and all sections of the people that a standard rate of 18 per cent is the most acceptable rate, given the economic situation of this country. Sir, let me conclude by saying that when this Bill is passed today we will prepare for the next stage of the debate. The next stage is the Central GST Bill and the Bill, which was earlier called, the IGST Bill and perhaps, it will be called today the Goods and Services Tax Bill. I want an assurance from the Finance Minister. This is far too important legislation which will last for the next 100 years. Not to hide behind any technical arguments, I want an assurance from the Leader of the House, the hon. Finance Minister, my good friend and fellow lawyer that when that Bill is brought, it will be brought as a Financial Bill and not as a Money Bill. Therefore, both the Houses will debate on both. Too many Bills have swept through the cracks as Money Bill. It has been challenged in the Supreme Court by one of our distinguished colleagues here and let us see what the outcome is. But this is far too transformative, far too revolutionary a legislation that one House will vote and the other House will speak. I think, both the Houses must debate it.

Both the Houses must be allowed to vote and this is something within the power of the Government to say, ‘yes, we will introduce the CGST Bill and the IGST Bill as Financial Bills and both the Houses will debate, both the Houses will vote’, and I ask the Finance Minister that assurance, and, I say, after the debate, my Party will support this Bill, but we require assurances from the Finance Minister. Thank you