Can GST reforms be a game changer? Montek Singh Ahluwalia responds

India Today

In an exclusive interview with India Today TV, former Planning Commission Deputy Chairperson Dr Montek Singh Ahluwalia talked about upcoming GST reforms and pitched for a 14% single rate formula.

Transcript

00:00Joining me now is Dr. Montek Singh Aluwalya, former Deputy Chairperson of the Planning Commission,

00:05one of the architects of India's economic reforms.

00:09Dr. Aluwalya, do you see the potential for GST reforms at a time of Trump tariffs becoming a game changer?

00:23Dr. Aluwalya?

00:28Dr. Aluwalya, can you hear me?

00:30Okay, we're trying to get through to Dr. Aluwalya at the moment.

00:37Remember, Dr. Montek Singh Aluwalya, as I said, has been one of the architects of economic reforms in the country.

00:44Someone who's spent a lifetime really looking at the state of the economy.

00:49Former Deputy Chairman of the Planning Commission, he's been Finance Secretary,

00:53was part of what was then dubbed as Dr. Manmohan Singh's dream team that looked at how to really take India out of the slow growth trap,

01:06the 1991 reforms.

01:07And many believe that GST, which was brought in by the Narendra Modi government in 2016,

01:12was a major transformation in indirect taxation in the country.

01:18The idea of creating a one-tax, one-nation regime.

01:22But over the years, because of differential slabs, there have been question marks over GST,

01:28both on compliance issues, both on how do you simplify the tax.

01:33And at a moment like this, when the Trump tariffs have come in place,

01:37GST becomes very important because how do you then in some way spur domestic demand?

01:47The hope, of course, and the Prime Minister announced this at his Independence Day speech

01:51was that this would be part of a Diwali dhamaka.

01:55Now, against the backdrop of that, we've had a meeting like this.

02:00I want to go straight across to Montek Singh Aluwalya now.

02:03Dr. Aluwalya, how do you see these GST reforms that are likely to come in in the next 24 to 48 hours?

02:11Can they be a game-changer at a time when Trump tariffs have loomed large over the economy?

02:23Well, what I've heard is that there will be a big reduction in rates

02:28across a large number of commodities.

02:31That's more or less what I think the Prime Minister had implied

02:36because it's kind of a Diwali gift.

02:39That will be welcomed by consumers, no doubt, but that's not a reform.

02:44I mean, if you want to reform the GST,

02:47then you have to address some of the structural deficiencies in the GST

02:51which have been talked about for some time.

02:53It's difficult to judge what the GST Council is actually discussing.

02:58If it's just discussing a reduction in rates, that's fine.

03:03If the government can afford the loss of revenue, people will be happy.

03:08But if you're talking about reforms, then you need to talk about

03:11what's the structural change that constitutes a reform.

03:15There are lots of things that have to be done to the GST,

03:18but I have no idea whether that's what they're thinking.

03:22You know, frankly, I think this raises a larger issue.

03:26There's a fault in the GST Council system.

03:31You know, in the days when these matters went before Parliament,

03:35the Finance Minister, in the budget speech, would make some proposals

03:39that these would be discussed, both within Parliament and outside Parliament.

03:44Government would hear different points of view,

03:47and then they could take a view on modifying them in the light of discussions.

03:53These GST discussions are all behind the curtain.

03:56What is being proposed is not put forth in the public.

04:00So you just have to wait until the GST Council decides.

04:04And the problem is that once it's decided, that's final.

04:08Even in Parliament, that can't be changed.

04:10But Dr. Aluwali, all the finance ministers are present at this.

04:17May I just stop you for a moment to say that all the finance ministers

04:20are present in the meeting.

04:22There is generally a consensus that by and large,

04:26GST has been a positive for the country.

04:29The idea that you could...

04:32Oh, I have absolutely no doubt

04:34that the introduction of the GST has been a huge positive.

04:38It's also true that many people have felt

04:41that the GST that we've put in place is not an ideal one.

04:47I mean, remember, in terms of revenue,

04:50we have been getting less revenue

04:52than the previous peak as a percent of GDP.

04:56I think instead of 6.5%, it came down to about 5.6%.

05:01But then we had a lot of cesses, which are outside the GST.

05:04If you include the cesses, we've just about reached where we were

05:09just before the GST was introduced.

05:11Now, the idea of the GST was that it would promote compliance

05:15and lead to an increase in revenue as a share of GDP.

05:19That has not happened.

05:21Even if you include the cesses' realization,

05:25as a share of GDP, revenues are actually a little below

05:29what they were at their peak.

05:31Now, it's well known what needs to be done.

05:34And people have talked about it.

05:36I mean, they've said that we have too many rates.

05:38That's not at all what a GST does.

05:41A purist would say you should have just one rate.

05:44But people would concede that maybe you need two.

05:47And, of course, you have a certain number of commodities exempted.

05:51And we, at the moment, have about seven rates,

05:53including the low ones for jewelry.

05:55According to the newspapers, we are going to get rid of the 12% rate

06:03and bring it down to everything in 12% will go down to,

06:08or most of it will go down to five.

06:10That's a straight reduction of the rate.

06:13I don't know how much will actually go up to 18.

06:16It's not clear what we're going to do with the 28% rate.

06:19It's not clear what we're going to do with the CES.

06:22Is the CES going to continue?

06:24And there's a real issue there.

06:26The CES, in my view, is an aberration.

06:29Because what it is doing is it is generating tax-related revenue

06:33which is not shared with the states.

06:34Now, half the problem that the states have

06:38is that the CES is not something that's shared with them.

06:42Now, all these things have to be looked at in a composite way.

06:45And I feel that the best thing would have been

06:48for whatever proposal, let's say,

06:51the finance ministry wants to take to the GSD,

06:54should have gone forward as a sort of proposal.

06:57And then they hear all the finance ministers

06:59and the council takes a view.

07:02But that proposal should have been made public

07:04so we know what is being proposed

07:06and we can talk about what the problem is.

07:09Right.

07:09Let me just give you one simple example.

07:11You know, if you reduce, let's say,

07:15if you reduce the 15% rate down to 5%,

07:19what will happen is that, yes, the rate will go down.

07:24But actually, a lot of the input tax credit,

07:27which normally accrues when you're at 15%,

07:31will no longer accrue.

07:32Because at 5%, the input tax credit is limited

07:36to the input tax credit only on goods

07:39and not on services and not on capital investment.

07:45So actually, these individuals who will end up

07:48with a lower, the producers,

07:50who will end up paying a lower tax,

07:52will also lose a lot of input tax credit.

07:56So I'm not sure the net-net what the effect is going to be.

07:59And I think that we need to consider this question.

08:03Are we willing to have two rates?

08:05Personally, I think 5% is too low a rate.

08:08I know it's very attractive.

08:10But, you know, I would have thought,

08:12if you wanted a single rate,

08:14probably what you should have done

08:15is have a 14% rate,

08:18which is 6% for the center,

08:206% for the states,

08:22and 2% for urban local bodies

08:26and local...

08:27the third level of government,

08:29because they don't get anything.

08:31And yet these urban local bodies

08:33lost a lot of revenue

08:34when the octroi was abolished.

08:36Now, that would be a real reform.

08:39If you don't want to have just one rate,

08:40then you can have two.

08:42But I'm not sure whether that is

08:43even on the agenda at the moment.

08:46And I do think that the issue of SES

08:48needs to be addressed.

08:50I mean, there is no logic...

08:50accounting for a rising percentage of revenue.

08:56I think you've given us, Dr. Aluwali,

08:58an idea.

09:02You've given us an idea,

09:03which I hope is going to be looked at.

09:066% for the states,

09:096% for the center,

09:10and 2% for urban local bodies.

09:13So, you could have,

09:15in your view,

09:15a 14% rate.

09:17Very quickly,

09:18do you believe, though,

09:20that we will, therefore,

09:22either way,

09:22have a better GST in place?

09:25And that's one of the learnings

09:27of the last 8 years

09:28since GST has been in place.

09:30Every government makes possible mistakes.

09:33Very quickly,

09:34I have a minute only on the show with you.

09:36Do you believe, therefore,

09:38that we are at least moving

09:39in the right direction,

09:40that there is now a wake-up call,

09:42that we cannot have

09:43such a complicated GST structure,

09:45which many believe

09:46has even led to corruption,

09:49with GST notices being sent

09:51by GST inspectors?

09:52But that, let me say,

09:53that's not a wake-up call.

09:56That has been known for some time.

09:58All that we're doing at the moment

10:00is picking one of these rates

10:01and lowering it massively.

10:03I do feel,

10:04I do feel that if we want to move

10:06towards a single-rate structure,

10:09then what I've suggested,

10:10that is 6%, 6%, and 2%,

10:12would be very good.

10:14You know, frankly,

10:15urbanization cannot be financed

10:18unless the urban local bodies

10:20get more revenue.

10:21And this is the best way of doing it.

10:23I will concede

10:24that maybe one rate may be too much.

10:27You can have a second rate.

10:29But at the moment,

10:29we seem to have too many.

10:34Okay.

10:37Let me leave it there.

10:39Let me leave it there,

10:40Montek Singh Aluwalia.

10:41I hope someone there

10:42in those meetings

10:43is listening to your voice of wisdom.

10:45We have far too many rates.

10:47The time has come

10:48to rationalize GST.

10:49Will that happen

10:50in the next 24 hours?

10:51We'll wait and see.

10:52Thank you very much

10:53for joining us.

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