TNGST from Rajaji to Arun Jaitley, a sea change in state finances

Chennai: A patient reading of the 221-pages ‘The Tamil Nadu Goods and Services Taxes (TNGST) Bill, 2017’, introduced in the Legislative Assembly few days back by the Edappadi K. Palaniswami government, evokes awe and reverence to the monumental changes in State public finance it promises to unleash in the coming years.

It so much reads like a carefully drafted book of supreme Law, that one may have, under the charming old-fashioned liberal worldview, tempted to metaphorically see it as the ‘new Bible’ of Public Finance, in the wake of the Central GST regime ushered in by Parliament through the Constitution 101st Amendment Act, 2016.

But with post-modern religious sensibilities being too serious about everything, sensing the depth and scope of the big changes the TNGST Bill speaks of, one would rather settle for a generic description of it as the possible ‘new scripture’ of Public Finance that will largely determine State’s incomes and expenditures.  

As has been widely discussed for years now, the idea of the GST for all goods and services in the entire supply chain or transaction network from the manufacturer’s stage to the last retailer and consumer, is to avoid multiple taxes by various Central and Stage agencies. A unified and harmonious GST is aimed at avoiding tax on taxes, to plug their cascading effects, minimise distortions, open the vast domestic Indian market to greater logistic flexibility by removing non-tariff barriers and cut costs for all in the long-term.

Under the new GST, as ushered in by the Central government, all indirect taxes will be subsumed under it. As the Bill’s Statement of Objects and Reasons states, “any tax that is presently being levied by the Central government or the State governments on the supply of goods or services is going to be converged in Goods and Services Tax, which is proposed to be a dual levy, where the Central government will levy and collect tax in the form of Central Goods and Services Tax and the State government will levy and collect tax in the form of State Goods and Services Tax on intra-state supply of goods or services or both.” The GST Council will recommend to both Centre and States on all GST issues.

Surely, this is a far-reaching measure having profound implications for ‘fiscal federalism’ in India. However, confining to the State GST for now, there are several new features, which traders and businessmen will have to get used to in the first place before its actual roll out. Take for example, the ‘scope of supply’ of goods under the new law in the making. It will not only include just ‘sale’ or ‘transfer’, but also ‘barter’. It reminds one of a classic stanza in Sangam period Tamil poetry, wherein Poompuhar port was the focus of the most transparent system of ‘barter’, and where people from the hinterland exchanged goods with those they had use for from the coastal basket. We do not know if there was a hidden tax then, but now even ‘barter’ will come under State GST umbrella. Tax liability will be there even on a ‘composite or a mixed supply’, says the Bill.

Though the GST Council would decide the tax rates to be levied, alcoholic liquor is still exempted, which may be taxed at rate not exceeding 20 per cent. Further, the State will continue to levy tax on supply of petroleum crude, high-speed diesel, motor spirit or petrol, natural gas and aviation turbine fuel.

This would be huge slice of comfort for the proponents of State autonomy, as Tamil Nadu Finance minister, D. Jayakuamr himself indicated, though States would still need to keep the GST Council in the loop.

Freebies and populist sops, which so much bring votes to regional political parties, could become lot more pricey for State governments in future, for the new State GST Bill says the “value of supply includes subsidies directly linked to the price”.

“The amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy,” says the Bill. The implication seems to be if ‘X’ supplies ‘mixers’ to the government for a freebie scheme, the supplier should factor the subsidy amount as his cost. “The value of supply shall not include any discount,” it adds. What such new features mean require lot more elucidation from the tax administration authorities. As one moves from one section of the State GST Bill to another, several similar issues will need to be clarified to users.

Even as the existing officers under the ‘Tamil Nadu Value Added Tax (VAT) Act, 2006’, will automatically become the new officers to administer the new State GST, once it comes into effect, it will simultaneously repeal a host of other existing State laws including the TN VAT Act, TN Betting Tax Act, TN Entertainments Tax Act, TN Tax on Luxuries Act, TN Advertisement Tax Act, TN Tax on Entry of Motor Vehicles into Local Areas Act, and TN Tax on Entry of Goods into Local Areas Act, 2001.  

While this is a logical consequence of the GST concept itself, the compliance provisions for a good section of industry, trade and business (leaving aside large business houses who would be equipped with the latest electronic processes), seems very cumbersome. The corresponding penalties for non-compliance are not simple either. For example, Sec. 123 says, a penalty of Rs 100 would be “levied for each day during which the failure to furnish such returns, subject to a maximum of Rs 5,000.”

From the State government point of view, the biggest worry would be over how to apportion the payouts of “input tax credit”, between the Centre and States and the mechanism for it, as GST is collected at both levels, not to speak of the revenue implications when money transfers to States are delayed.  

Historically, Rajaji as premier here of the erstwhile Madras Presidency in 1939 first introduced Sales Tax, termed by his biographer Rajmohan Gandhi, as the “most innovative financial innovation and which was destined to become the mainstay of all State governments.” Nearly seven decades later, under the stewardship of the present Union Finance minister, Mr. Arun Jaitley, the GST, in its most ambitious ‘avatar’ in post-Independent India, after the L.K. Jha and Raja Chelliah-inspired ‘MODVAT’ and ‘VAT’ experiments, may well redraw the very geography of fiscal autonomy of States.