The GST Council and five next steps for the GST

V Bhaskar
A majority of state legislatures are expected to ratify the Goods and Service Tax
(GST) Constitutional Amendment Act shortly. This enabling amendment opens the
doors for the design and implementation of the nationwide GST. The immediate next
steps for implementation of the GST needs to be taken by the GST Council which
will be constituted after the Act becomes effective. Like the small hinges which
swing open massive vault doors, the Council will be the gateway to the successful
implementation of a GST, a national market and sustained accelerated growth. The
Council represents a radical shift in structure, functions and responsibilities from the
present Empowered Committee of State Finance Ministers which till now has been
coordinating GST issues . It is now a constitutional body with correspondingly
onerous duties and obligations outlined in the proposed Article 279A. It therefore
needs to operate in a transparent, predictable and consistent manner so that it
commands the respect and credibility of not only of its members but also those of
all the stakeholders in the GST spectrum ranging from manufacturers, traders and
service providers to consumers , civil society and the nation at large. Five steps the
Council may consider taking up as part of its initial work are suggested below.

1. Rules of Procedure
The Council had crucial responsibilities relating to finalizing the tax base by
deciding on the goods and services to be exempted, the threshold for taxation, the RNR
and the rate structure. These are far reaching issues, which will impact the economic
interest of all the states and the Center and may therefore be subject to intense
debate. In the interests of its credibility and predictability, it is essential that the first
item of business for the Council should be to finalize its rules of procedure. The
Council has to move beyond the present operating procedure of the Empowered
Committee as regards calling of meetings, fixation of agenda, recording of minutes to
a more formal level. The Councils functioning over the next six months/ one year will
be critical to the successful rollout of the GST. What should be its detailed work plan
of this period? Based upon the work plan, the number of meetings as well as the
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agenda for each meeting needs to be finalized. In most Empowered Committee

meetings, finance and taxation secretaries of the state and central governments
significantly contribute to the debate specially on technical issues. Can such an
arrangement desirable to ensure that State Ministers are not overly burdened with
methodological issues be continued in the Council? It will have 33 members (31
state ministers and 2 union ministers), which may make discussion and decision
making time consuming. Should it adopt a Committee system as followed in
Parliament? To what extent should the GST implementation structure be subsumed
in subordinate legislation? Consider the Place of Supply rules ,or the Registration
Rules should they be incorporated in the GST Act or find place in delegated
legislation? Answers to such questions will influence the national character of the GST
and should preferably be decided upfront.

2. Incentives
Incentives drive all human behavior. The State and Central Governments are
no less susceptible than humans to the power of incentives in influencing their
stance in the Council. The Council needs to ensure that, as far as possible, there is a
convergence of incentives amongst all its thirty three members before moving on to
the main discussion on GST. This is best addressed by getting the compensation
formula right. Parliament is obligated to make a law, to provide for compensation for
revenue losses to the state governments for a period of upto five years, based on the
recommendations of the Council. To ensure that its discussions on the structure and
implementation of the GST are not tainted with the problem of moral hazard, the
Council should immediately after finalizing its rules of procedure , finalize its view on
the payment of compensation. All states will prefer payment of 100% compensation
for all their losses for the full period of five years. This proposition should be stoutly
resisted, as states may then become indifferent to the revenue collection under GST
for this entire period. States should have a strong stake in the success of the GST.
This can best be ensured by providing for a tapered compensation formula- 100% in
the first year, 75% in the second year gradually tapering off to 25% in the last year.
This will ensure that states have a strong, continuing and increasing stake in the
success of the GST . A similar compensation formula was adopted when VAT was
implemented.

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3. Predictability
To promote investment and growth, changes in taxation policy should either be
predictable, or introduced after due notice. There should be no vacuum of
uncertainty. Manufacturers, traders, service providers and consumers all over the
nation and consequently the economy will be affected by the recommendations of the
Council. Design features and changes to the system should be decided by the Council
only after following a prescribed procedure and after giving due notice to all stake
holders. Article 269A mandates the Council to make recommendations on three
issues which may not have immediate relevance to the GST rollout, These are (a)
special rates to deal with natural disasters,(b) Special provisions for the NE states (c)
date on which petroleum products will be subjected to the GST. To avoid uncertainty,
the Council may like to indicate when and in what manner it will address these three
issues . For example, it could state upfront in which year it will recommend ( or at
least consider ) inclusion of petroleum products in the GST base. To allow the new
system to settle, it could also say that it will not review its initial recommendations
including on GST rates for a period of say two years. The Council should also
recommend, keeping in view its work plan as well as the requirement of lead time for
trade and industry , the earliest possible date for the implementation of the GST.

4. Inclusiveness
The Council, singularly is clothed with legislative, executive and judicial
powers. The Council will recommend GST legislation, oversee implementation of the
GST in the country and through an instrumentality adjudicate disputes between its
members. These are sweeping powers, making it akin to a regulator for GST. It should
therefore exercise all its powers with the utmost inclusiveness. Steps to be taken could
include putting up draft consultation papers in the public domain and inviting
comments, regularly inviting trade bodies, professional associations, academics and
consumer forums to submit their view on issues being deliberated by it, participating
in information, education and communication programs in association with state and
central governments and setting up an interactive and continuously updated web site
in all languages.

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5. GST Law and the Rate Structure

Paradoxically, the CGST laws and the GST laws, the RNR and the rate
structure, which are the subject of intense debate all over the country today, have
in our view only the fifth priority in the Councils order of business. They should be
addressed only after the four issues outlined above have been satisfactorily tackled.
This is so for two reasons. First, without an enabling and conducive work
environment in the GST Council, productive discussion on the intricacies of the GST
may be difficult. Second, while it is relatively simple to determine the RNR for the
Central GST, computing the RNR for states individually is difficult at best and
impossible at worst. There are difficulties in estimating the projected share of service
tax that will accrue to every state after accounting for their respective input tax
credits. In any case, as was seen during the implementation of VAT, finance ministers
are notoriously conservative ( maybe rightly?) in their estimation of their state RNR.
The GST rates will not be not cast in stone. If necessary, they could be revised
upwards (hopefully downwards too!) after an implementation period of say two years.

Conclusion
Over the last sixty-six years of the Indian republic, the union and the states
have remained good fiscal neighbors. This is because the Constitution allotted
mutually exclusive tax bases to each. This tax fence between the Centre and the
States is now being dismantled by the GST. For the first time, the Centre and the
States will share a common tax base with the GST Council providing the
instrumentality to do so. Whether such sharing of the tax base is both harmonious
and sustainable will be the true test of the success of cooperative fiscal federalism in
India. The GST Council bears the heavy burden of proving that it is so.
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