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Somehow, many of us seem
to believe Indian institutions cannot be successful and if we find some success
stories, we either look at them in disbelief or eulogise them. Arvind
Subramanian’s recent fascination about the success of GST as an institutional
success story is a case in point (BS, Feb 24). Surely, there are several success
stories of institutions in India and GST is not an isolated case. Further, GST,
which is yet to be implemented, is only the next stage of perhaps the most
successful tax reform in India, of replacing the cascading type sales tax with
14-16 tax rates with the value added tax with two rates in April 2005.
Surely, GST, if properly implemented, can be an institutional success, but the
story that Arvind Subramanian tells is more a fiction than real. The problem is
not with the GST reform, but with his understanding of the reform process.
Understanding GST reform requires caring for history and this cannot come from
conjectures and hearsay. The least Subramanian could have done is to check the
facts and do some serious research on how the institution of ‘Empowered
Committee of State Finance Ministers’, which has spearheaded the reform, came
into being. We know that success has many fathers and failure is an orphan.
Nevertheless, if we have to learn from history, we need to identify the right
father.
The history of tax reform to replace the cascading type sales tax with several
rates with a value added tax goes back to the seminal report by the Report of
the Study Team on ‘Reform of Domestic Trade Taxes in India’ in 1994, of which
the late Amaresh Bagchi, the then Director of NIPFP, was the convenor. The
report was submitted by the Study Team to the then finance minister, Dr Manmohan
Singh, and it provided the blueprint for transforming the prevailing cascading
type sales tax system with 14-16 tax rates into a value added tax. It goes to
the credit of Dr Manmohan Singh for appointing the State Finance Ministers’
Committee comprising of 11 states to harmonise the process of sales tax reform
with Dr Raja Chelliah as its Convenor. One of the first tasks of the Committee
was to arrange the visit of the states’ finance ministers to the countries which
have successfully implemented the VAT. The finance ministers were divided into
three groups, to visit (i) Belgium and France led by Raja Chelliah, the then
advisor to the finance minister; (ii) Spain and United Kingdom accompanied by
Amaresh Bagchi, Director, NIPFP and (iii) Thailand and Indonesia, accompanied by
yours truly, who was the Secretary to the Committee. The Committee prepared the
report which detailed the blueprint for VAT reform and NIPFP continued to be its
secretariat. The committee’s recommendations were endorsed in the Chief
Ministers’ conference, which constituted a Standing Committee of State Finance
Ministers comprising of finance ministers from seven states in November 1999.
The West Bengal finance minister was appointed as the Convenor of the Committee
and in this Raja Chelliah played an important role. This was later converted
into the Empowered Committee of State Finance Ministers on 17th July, 2000 by
the government, and by this time the finance minister of West Bengal had emerged
as a natural leader. In addition to the finance ministers from seven states, the
membership included Delhi and Meghalaya. Subsequently, in August 2004,
membership was extended to include finance ministers from all the states — the
West Bengal finance minister continued to chair the Empowered Committee.
In the entire exercise, Raja Chelliah played a stellar role in providing the
background research at NIPFP and educating the finance ministers in the virtues
of having a destination-based VAT and the benefits of having seamless trade in
the federation. The clear evidence of this is the fact that even after the
Constitution was amended (46th amendment) to treat consignment transfer as
‘sale’ and levy the tax on it, it was never operationalised despite tremendous
pressure from the states. Had this been implemented, it would have choked the
economy by creating several impregnable tariff zones and made phasing out of the
tax on inter-state sale extremely difficult. It goes to the credit of Chelliah
and his colleagues at NIPFP in persuading the policy makers in the finance
ministry of the perils of taxing consignment transfers. Surely, the Empowered
Committee did a commendable job of bringing about consensus first, to harmonise
and reduce the number of tax rates to five and later introducing the intra-state
VAT with two main rates. That is a landmark reform and hopefully, we would see a
broad-based GST in not too distant a future.
Most, including Arvind Subramanian, consider the GST to be the ‘game changer’,
and one reason for the optimism is that “it could generate additional annual
revenue of 1.5 per cent of GDP”. I do not know where the estimate comes from,
but from this, if he means that the governments will garner additional revenue
amounting to 1.5 percentage points every year, then we are in for trouble; there
will be government everywhere! If on the contrary, the revenue will increase by
1.5 per cent of GDP due to GST reform, then it is not really much. I would like
to point out to another institutional reform initiated in 2004, of instituting
the Tax Information Network (TIN) with NSDL entrusted with the task of
implementing it. The reform resulted in the income tax revenue as a ratio of GDP
increasing from a mere 2.8 per cent in 2003-04 to 6.5 per cent in 2007-08, a
clear increase of 3.7 percentage points, before marginally declining to 6.1 per
cent in the wake of the economic slowdown. Here is an unsung institutional
success story, which actually helped the Centre to compress the fiscal deficit
from 4.5 per cent in 2003-04 to 2.6 per cent in 2007-08 before the benefits were
squandered away.
For the successful calibration of VAT and the efforts put in to evolve consensus
on the GST, a lot of credit must be given to the Empowered Committee of State
Finance Ministers. It also goes to the credit of the successive finance
ministers at the Centre, irrespective of their party affiliations, for ensuring
unfettered functioning of the Empowered Committee. This gives the hope for what
Lord Keynes said: “…ultimately, it is the ideas and not the vested interests
which are dangerous for good or evil.”
Source:
Business Standard, India, dated
21/03/2010
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