The month of January is named after the ancient Roman God Janus, who is depicted as having two faces – one facing forward and the other backward. This symbolises the importance of looking back at the year gone by and simultaneously looking ahead at the new unfolding year. It’s a time for deep introspection and understanding the lessons learnt so that the coming year can be planned for course correction.
Looking back at 2024, the decisions taken at the 55th GST Council are a symptom of slipping back to the old harmful habits of chronic tinkering with individual rates, promptly overruling any adverse Supreme Court ruling and very high rates of tax that on the one hand suppress demand and dampen growth, and on the other, are an incentive for tax evasion and a thriving parallel/black economy.
In 2014, the late Arun Jaitley termed retrospective taxation “tax terrorism”. Prime Minister Narendra Modi has also condemned this practice on more than one occasion. But the 55th GST Council has now recommended a retrospective tax amendment to nullify a recent Supreme Court judgment that would have resulted in granting input tax credit to warehouses and infrastructure projects. The nature of the dispute, the judgment and the impact of the proposed retrospective amendment from July 1, 2017 merit a separate article. What is retrograde is the message being sent to the business world: We will first deny you relief, if you still fight us for several years and up to the Supreme Court and succeed, we will simply reduce the judgment to a nullity by a retrospective amendment. If we win in court, fine; if we lose, we will still win by a retrospective amendment.
Sadly, the GST department may succeed in recovering a few additional crores of GST by the amendment. But the collateral damage to India’s reputation as an investment decision is staggering. Apart from disrespecting your own Supreme Court, the message conveyed is the absence of the rule of law.
The Vodafone verdict was a golden opportunity to showcase India as a rare developing nation where court verdicts are respected and the rule of law prevails. The ill-advised retrospective amendment to nullify that judgment resulted in an international award of Rs 8000 crore, which India had to pay. It is time to have a new year’s resolution: No more retrospective amendments.
The fatal flaw in the functioning of the GST Council is the single-minded focus on revenue maximisation. The department repeatedly has news items published that only report tax evasion — often with exaggerated claims. No attempt is made to rationalise rates, cut down complicated notifications and circulars, check arbitrary and exaggerated demands through show-cause notices and create a fair and impartial appellate system.
It is morally unfair and economically disastrous to levy GST on various goods and services but deny them input tax credit. In particular, the GST Council must seriously rethink the levying of GST on lease rentals, on assignment of leasehold rights, and joint development rights as these are neither goods nor services. This will be a huge boost to the real estate sector and, indeed, the economy if there is no GST on any activity other than works’ contracts. It is paradoxical to speak of affordable housing but make it unaffordable by multiple taxes.
It is necessary to have careful empirical studies of the impact of high taxes on consumption. Will lowering of taxes stimulate demand, eventually resulting in larger tax collection? Will lowering of taxes enable Indian companies to compete with similar Chinese products? For example, why cannot there be a single rate of 12 per cent on all hotels and restaurants instead of multiple rates based on room tariffs and other parameters? Will a maximum rate of 18 per cent on cement reduce the cost of affordable housing and infrastructure projects?
High rates of tax, a complicated system of exemption and concessions, and an overarching focus on revenue collection were the hallmarks of our direct and indirect tax system from 1950 to 1990. This socialist mindset crippled the Indian economy and led to the 1991 liberalisation that gave a boost to the economy. Looking back over the last few years, there are several signs that we are once again getting back to the old retrograde system that is a paradise for lawyers, chartered accountants and revenue officers but a nightmare for businesses.
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The adverse consequences are clear: Imports from China have increased from $70 billion in 2018-19 to $100 billion in 2023-24, the share of manufacturing has slipped to below 15 per cent of our GDP, and the further sliding of the rupee is now taken for granted.
The present system retards growth and discourages fresh investment. This leads to lower revenue collection, which is then sought to be remedied by higher taxes, which, in turn, leads to lower growth. The dangers of such a downward spiral are real and require urgent attention.
The GST Council and, indeed, the Central Board of Direct Taxes must now adopt a new policy framework that focuses on growth maximisation. Taxes must be a byproduct of growth and not an end in itself. After 1991, it is time to put in place Reforms 2.0, which will enable a 9-10 per cent annual growth rate. This growth rate is attainable, provided we have the courage to overhaul our tax system. It is indeed time for a new long-term fiscal policy for 2025-2030. As is true for an individual, so it is for a nation: There is no rebirth without death.
The writer is senior advocate, Supreme Court of India.
