It is now fairly certain that the 1 April roll out of the grand indirect tax reform, Goods and Services Tax (GST), isn’t happening. The plan is comfortably put on the backburner at least till September, when the time given by the constitutional amendment will automatically expire for GST roll out, meaning that the new regime will have to kick in by then.
There are two clear reasons why GST isn’t happening now as planned. One, till now, there is no consensus on the contentious issue of dual taxation between the centre and state governments. States, especially the likes of Tamil Nadu and Kerala, are hell-bent on their demand that control of companies with annual turnover of less than Rs 1.5 crore should rest with them. A data goof up by the centre has worsened the relation (read here ). Centre isn’t too comfortable with the idea of giving up too much to states.
This was evident when the GST council met on Sunday. With no consensus in sight on the crucial issue, GST is unthinkable for 1 April since two important supportive legislations, central GST and integrated GST, is yet to pass the House test. The current session gets over on 16 December and there is no time to pacify the states and opposition by then. The next likely meeting of GST is planned for end-December
The second reason is the change in political climate post demonetisation. Though states wouldn’t flag the political displeasure on demonetisation for slowing the GST bandwagon (as it would be seen as a regressive step), the hardening of resistance by states like Kerala on the revenue sharing issue is because of the adverse impact of the demonetisation. Demonetisation has triggered political and economic impacts in different states in different ways. This has also, states allege, gone against the centre’s promise of cooperative federalism . States like Kerala are in a sort of political crisis with the key sector of cooperative banks (a big employer and key institutions for low-income groups/ farmers) being hit hard. There are enough evidences around to believe that services, manufacturing too would have taken hit in the demonetisation resulted cash-crunch.
The hard-won political consensus on GST by finance minister, Arun Jaitley, is now on shaky grounds due to the ongoing tussle between the Narendra Modi-government and key opposition parties on the demonetisation issue. The opposition parties have been harping on prime minister’s persistent reluctance to speak on the issue in the House and use that a reason to take the House business to a standstill. The Modi-government too, so far, has not been able to justify the the demonetisation exercise with hard evidence. With no immediate monetary gains in sight, recovering black money—the originally highlighted objective of the operation—looking a tall order and ‘cashless economy’ turning the only savings grace, the Modi-government will have a tough time explaining the opposition, the negative economic impact and the prolonging pain to common man. This is an uncomfortable situation for the government.
But, in the post-demonetisation scenario, it is good both for the centre and the state to have a late GST, rather than facing another mammoth implementation challenge. In the post demonetisation days, the Indian economy is already having a tough time in manufacturing, services sector and even on discretionary consumer spending—all of these has taken a hit. Auto sales numbers and November PMI data offer enough evidence of the near-term growth impact. The Reserve Bank of India’s (RBI) fiscal year 2017 growth downward revision (from 7.6 percent to 7.1 percent) , which doesn’t even take into effect the demonetisation impact fully , adds to the worries.
The most optimistic expert assessments (except from the government) of the economy returning to normal cash conditions are March. In such a scenario, the immediate disruptions GST roll out by April will have a double whammy effect on the economy. September sounds more realistic. Also, the industry isn’t ready for an early GST roll out, especially in the aftermath of demonetisation shock. What does a delayed GST means to the investor? It is not a surprise, said D K Joshi, chief economist at Crisil rating agency, Indian subsidiary of Standard and Poor’s. “Anyway, we were of the view that April roll out lacks the necessary preparedness. Right now the focus should be on the roll out of demonetisation,” Joshi said. But yet again, how soon the government can contain the impact of the demonetisation cash crunch is critical, before the Modi-government can even think of readying to welcome the GST juggernaut. For now, it’s a goodbye to April GST and the delay is good news to all in demonetisation days.