Goods and Services Tax (GST), India’s biggest tax reform since Independence, was ushered in today with a special midnight session of Parliament. Yashwant Sinha, former Union finance minister, senior BJP leader and co-editor of ‘The Future of the Indian Economy’ spoke to Nalin Mehta and Sanjiv Shankaran about GST’s challenges, its impact on the federal structure and next steps for reforms:

You have written about the difficulty of economic reforms in India because of a lack of political acceptability. How difficult was it to pass GST?

The very fact that GST has taken so many years in coming and at the end of it we have a flawed GST – it’s not the original GST we had imagined – demonstrates how difficult it is to carry out economic reforms in India.

I have always held the view there is a great deal of political opposition to economic reforms in India. If you go through the parliamentary standing committee report on GST, it clearly brings out the problem. During my years as finance minister, I was trying to push state value added tax (VAT) and the precursor to GST Council was created then, which worked on GST.

Starting in 1991, the government was able to carry out reforms in sectors directly under its control, like banking, industrial policies, central taxes, capital markets, etc. Reforms which are entirely in Centre’s jurisdiction and ones which do not require legislation are much easier to do. Where states had to be partners in reforms, the process became that much more difficult and things did not move that smoothly. Therefore, most important reforms have taken years to fructify. The evolution of GST is a clear demonstration of the difficulties.

Don’t these challenges make the realisation of GST unique?

Which were the states which opposed GST? Madhya Pradesh and Gujarat, ruled by BJP. Gujarat’s finance minister came before the parliamentary standing committee and made such a convincing presentation that committee’s members started saying there is no need for GST. I had to then request Vijay Kelkar (chairman, 13th Finance Commission) to appear before the committee again to convince the members that GST was desirable. It is very unusual to appear twice before the committee members. It has not been easy to evolve a consensus.

Why do you think this is a flawed GST?

As finance minister I had brought down multiple central excise rates to just three based on a philosophy: one excise or GST rate is the ideal. Even when you make compromises, what should determine slabs? A mean rate, a merit rate and demerit rate. You need only three rates and not more. In central excise, multiple rates used to lead to enormous amount of litigation. It was not easy to collapse multiple rates into three rates. It was achieved with a great deal of struggle. Now, all the problems have been brought back with multiplicity of rates. We had a single rate in service tax but now it is broken into multiple rates. That’s why it is flawed. The return of multiple rates is a step backward and will lead to implementation problems.

The second reason why it’s flawed is that an element of discretion has crept in. For example, why keep gold at 3% and notebooks at 12%? The most important step towards simplification is to do away with discretion. The philosophy of taxation must be firmly grounded in equity and simplicity, not in discretion. The third reason is that a large chunk of the revenue stream relating to petroleum, alcohol, electricity, etc is still out of the GST ambit.

How will the advent of a statutory GST Council impact federalism?

It is not so much the political complexion of a state government but its own estimate of gain and loss which determines its approach to a reform measure like GST. GST Council is a shining example of cooperative federalism, it’s a step forward. How will it work? It will depend on interaction of personalities. In future, GST Council will be a play of personalities and play of gain-and-loss estimates by states and government of India.

Where would you rank GST in terms of economic reforms since Independence?

I would rank Manmohan Singh’s 1991 budget as the biggest reform this country has seen. GST deals with just one indirect tax. As far as comprehensiveness of reforms is concerned, 1991 was the biggest.

What should be the next step on reforms?

Any measure which propels the engine of economic growth is economic reform. It is a continuous process. Having said that unless economic reforms are seen to directly impact people they would never be fully acceptable. Economic reforms must be accompanied with visible action on the livelihood and quality of life fronts. We must have high growth rates; there is no dispute about that. Simultaneously, take steps which impact on the quality of life and create employment.

Spanning governments, the common thread running through reforms is the committee of civil servants and technocrats preparing blueprints. Are they the invisible foundation here?

They are an important and visible foundation. In GST, you can never forget Vijay Kelkar. We have had distinguished experts from within government and outside contributing to reports which have gone into policy formulation. They are the real heroes of economic reforms in our country. They may not be celebrated but clearly they have played a stellar role. If you look at the post-1991 finance ministers they have brought a professional approach. Post-reform, prime ministers have been clear that finance ministry should be handled by a person who has an understanding. Therefore, a finance minister interacting with these experts has not been a problem.