Two Significant Reforms of the Week

Posted on July 27, 2018, No Comments admin

The last week witnessed two significant economic reforms:

The GST rate reduction

In the pre-GST regime, India had a complicated, inefficient, multiple Indirect tax system where each assessee could be levied upto 17 different taxes.  The GST consolidated them to one tax.  Since the passing of GST Constitutional Amendment Bill, there have been twenty eight meetings of the GST Council which has reviewed the GST tariffs on a continuous basis.  Obviously, the tariff rationalisation depends on the expansion of the revenue base.  The first one year has witnessed an encouraging trend in this direction.

The pre-GST tariff was a Congress Party legacy.  The standard rate for central excise plus VAT plus CST was 12% + 14% + 2%.   To this, if the cascading effect of tax on tax was added, the eventual tax payable on a commodity was 31 percent.  Items of household use from mineral water, hair oil, toothpaste, soap, dairy, to construction material and white goods were all taxed at 31 percent.  The total number of goods falling in this category was 235.  This 31 percent tax was Congress Party’s gift imposed on India.  This tax was the ’Congress Legacy Tax’.

The day GST was implemented, several items which were proposed to be put in the 28 percent category  (where the 31 percent items were adjusted) were brought down to 18 percent.  On 10th November, 2017, within four and half months of GST implementation, 177 items and on 21st July, 2018, another fifteen items were brought down.  Even in other GST meetings on individual basis, several items were considered and brought down.  Today, the 28 percent category is being phased out.  Bulk of these items remaining in this category are only luxury items or sin goods.  The other items outside the luxury–sin goods category are cement, air-conditioners, large screen televisions and a handful of others.  Hopefully, with further expansion of revenues, these few items may also witness a change of category.  Thus within a record period of thirteen months, the GST Council has almost phased out the 28 percent category.  It is only a matter of time that the final obituary of the ‘Congress Legacy Tax’ is written.  Only the luxury-sin tax would remain.

If the entire category of all the slabs is taken, the past one year has seen reduction of tax in 384 commodities with no increase on a single product.  India has never witnessed such mass tax reduction since Independence.  Lesser rates and higher collection is the result.

Similarly in the services category, which has now become a part of the GST, on four different occasions 68 different categories of services have witnessed their rates reduced.  The net revenue loss which Government have suffered on account of the reduction of tax on goods and services is about Rs.70,000 crores.  Since State Governments have been guaranteed a 14 percent increase over their pre-GST revenues for the first five years, this burden has entirely been borne from the share of the Central Government.  This tax reduction has reduced the cost to the consumers, increased his purchasing capacity and added to the increased consumption in the economy.  All household items stand reduced from 28 percent to 18 percent and 12 percent.  All items of construction except cement stands reduced.  Most white goods stand reduced.  There is no better opportunity for consumers to make purchases than in the environment which the GST has created.  It is an opportunity to celebrate the biggest tax reform since Independence, which has replaced ‘Congress Legacy Tax’ with a ‘good and simple tax.’

The passage of the Prevention of Corruption (Amendment) Bill, 2013

The present Prevention of Corruption Act, 1988 was legislated in the pre-liberalisation regime.  It had not visualised the changes in the economy, when higher participation of the private sector would take place.  It had also not anticipated the kind of risk that it could put honest decision makers to.  I had, for a long time, been advocating the change in this legislation.  In the past one week, both the Houses of Parliament have approved this Bill.  Both the Standing Committee of Parliament and, thereafter, the Select Committee of the Rajya Sabha had approved this Bill.  The Bill has two significant features.

The Bill seeks to punish both – the bribe giver and bribe taker.  It provides protection if the briber assists the investigative agency.  Even non-monetary gratification has been included within the ambit of the Bill.  Promoters of companies which hide behind the corporate veil to avoid the consequences of this Act, have been made more accountable.  Since the company cannot be sent to jail, the individual in the management responsible for the corruption will be held liable.

The bill has also corrected a fundamental flaw in the Act. The wide definition of corruption, which is referred to as ‘criminal misconduct’ in the original Act had a potential for including in its ambit, not merely dishonest decisions taken with a dishonest intention but as the history of its functioning shows, could also include honest decision taken by honest individuals which subsequently turn out to be erroneous.  Thus a loan given by an honest bank management in accordance with the rules, would get subsequently questioned if the recipient of the loan defaulted and the entire process of the banker-lender relationship was referred to an investigative agency.  The somewhat loose language of the Act enabled investigating agencies to shed apart their professionalism and followed the investigators golden rule ‘when in doubt, file a chargesheet’.  The result was many honest persons were harassed and eventually never convicted.  Reputations were ruined and a fear amongst decision makers was created.  This witnessed a tendency where civil servants would postpone decision making to their successor rather than take the risk upon themselves.  The new Bill, besides correcting the somewhat loose language, now requires the element of mens rea i.e. the dishonest intention to be proved for an offence of criminal conduct to be made out.  This will ensure that bonafide actions of public servants are not called into question.

The period of trial for corruption is now required to be completed within two years.  The Prevention of Corruption Act merely provided for sanction for serving civil servants and not retired civil servants.  On the contrary, Indian Penal Code required a sanction for those who are or have been public servants.  The two Acts have now been brought at par.  The scare created amongst the civil servants, bankers, heads of public sector undertakings and other decision makers, who have seen in the last few years professional investigation graduating into investigating adventurism, have a reason to be relieved.  The only group which is unhappy is some NGO’s who are not aware of the needs of governance, quick decision making and growth.  For these groups ‘chaos’ and ‘decision making paralysis’ is better than stability and growth.  I do hope that the investigators also realise that it is only professionalism and fairness which will ensure a higher rate of conviction.  Punishing the corrupt has to be judiciously balanced with non-harassment of the honest.

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