GST: Present at the creation... and beyond A PIECE OF MY MIND
By Team Legistify / 2017-07-14

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Acolumn in July 2017 has to be on the newly launched Goods and Services Tax (GST), indubitably the most significant and complex tax reform undertaken in independent India. So much has been written on its merits and demerits, there is nothing really new I can add, except to caution that we will only find out the true economic, social and administrative benefits and costs of this nation-wide overhaul of indirect taxes in the months and years ahead. Instead, I will share a few thoughts on the early years of the evolution of this tax, which is, in its essence, a national level system of value added taxation (VAT) of goods and services.

Many newspaper accounts of GST, including the front page report in this paper on July 1, start the story of India’s GST around 2000. That is misleading, by at least 15 years. Through the 1970s and right up to 1985, India’s structure of domestic indirect taxes at both central and state levels (and leaving aside the equally complex and badly designed customs tariffs) was a jungle of multiple rates, (about 25 major ones in the Central Excise Tariff alone), hundreds of end-use-specific concessions and exemptions and a conspicuous absence of the key VAT principle of allowing set-offs or credits for taxes paid on inputs used in production. The consequences for economic efficiency, equity, simplicity and stability were horrendous.

This jungle of taxes was reviewed by the excellent L K Jha Indirect Taxation Enquiry Committee Report of 1978. One of its major recommendations was to replace the Central Excise Tariff by a manufacturing level VAT, “MANVAT”. As with many good government reports, this one gathered dust for nearly eight years, until V P Singh became finance minister in the Rajiv Gandhi Congress government and launched modern tax reform in India. In his first (1985) Budget he undertook major reforms of direct taxes and committed to delivering a Long Term Fiscal Policy (LTFP) statement within a few months.

By a happy (for me) coincidence I had joined the finance ministry as Economic Advisor in February 1985 from the National Institute of Public Finance and Policy. Within a few weeks, I was tasked by Chief Economic Advisor (CEA) Bimal Jalan to be the anchor official for preparing a draft LTFP document. It was a fascinating and fulfilling opportunity to bring my academic training and international experience to the ground realities of fiscal policymaking in India. Under Jalan’s able leadership and intellectual guidance we were able to coordinate effectively with key colleagues in the Revenue and Expenditure departments and Montek Ahluwalia in the Prime Minister’s Office (PMO). Within about three months we had a draft LTFP which we discussed page by page in a series of meetings taken by the finance minister, with those present including finance secretary S Venkitaramanan, revenue secretary Vinod Pande, Montek from PMO, Jalan and myself.

The LTFP, which was laid in Parliament in December 1985, was an unique policy document marrying a medium-term public financial programme with a detailed agenda of direct and indirect tax policy reforms. The flagship reform in the chapter on indirect taxes was to usher in “a modified system of VAT, or ‘MODVAT’ for short”, whose key objective was to “progressively relieve inputs from excise and countervailing duties” through a comprehensive system of credits and set-offs in the central excise duty structure. Two months later, V P Singh’s 1986 Budget duly implemented MODVAT in 37 chapters of the Central Excise Tariff. This marked the first serious beginnings of VAT/GST principles in India.

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