Calling out the fraud

The important GST council meeting scheduled for November 25 to negotiate various points of difference between the states and the Union has been cancelled. The Union government’s imperious and dictatorial attitude on service tax assesses, its lowering of sin tax rate slab to allow for its cess to deprive the states from rightful revenue and various other factors show that New Delhi wants to ram down a one-sided GST bill. With a gun to its head in the form of rollout deadlines, the state Finance Ministers led by Trinamool’s Amit Mitra have called New Delhi’s bluff. The GST negotiations between the state Finance Ministers and the Union government have reached an impasse after it was exposed that the Union government had been concealing true data from the state Finance Ministers during a large part of the negotiations. This is as bad as fraud. The present stalemate is regarding the issue of jurisdiction on the service taxpayers in the under 1.5 crore revenue category. That the Union government has presented fraudulent data is a huge scandal that didn’t make headlines given how the Delhi-based think-tanks and all the crucial segments of business media is cheering for the Union government’s side in GST negotiations. This scandal should have ended the GST negotiations altogether, but the state governments have greater faith in cooperative federalism than the Union government had. Now that the fraud committed by the Union government has been exposed, Arun Jaitley is finding it difficult to defend the Union’s claims on a tax base that he earlier took for granted. Now, those “gains” by the Union government, based on fraud, is suddenly up for negotiation and grabs. This negotiation will decide the very crucial issue of federalism in the Indian Union – will the states retain any serious revenue autonomy at all or will they become total beggars seeking alms in the Delhi court.

The crucial issue is, who will control the service tax base for entities under the 1.5 crore Rupees annual revenue threshold. This is not a theoretical argument but one that is premised on numbers – the most crucial among which is the actual size of this under 1.5 crore revenue service tax payer base. In the initial meeting of the GST council, service taxpayer data supplied by the Union government to the state Finance Ministers showed a service taxpayer base of 11 lakhs. Negotiations thus happened on the basis of this number, which the state Finance Ministers in good faith believed to be true. It is not expected that in a crucial forum like the GST council, the Union government would be concealing real information and feed misleading information. Based on that 11 lakh number and its estimated revenue corpus, the states were magnanimous to the Union and decided to let the Union government retain control of the under 1.5 crore annual revenue service tax base. Everything changed when it turned out that this 11 lakh number that was supplied by the Union government to the state Finance Ministers was false.

New data available with the state Finance Ministers suggest that the actual service taxpayer base with under 1.5 crore annual revenue is over 30 lakhs! That’s almost 3 times the number that the Union government gave the states earlier. Now, the Union government has been forced to admit that this almost 31 lakh number is true. Chairman of the Empowered Group of State Finance Ministers, West Bengal’s Finance Minister Amit Mitra has directly accused the Union government of concealing service taxpayer information. A three-time increase in taxpayer base has very different revenue implications. On the basis of that, a majority of the states have now proposed that for the under 1.5 crore revenue class, state governments will have full control of both goods and service taxes, while over the 1.5 crore slab, there will be dual control and revenue sharing between the States and the Union. Any entity whose bluff has been called out so directly would be embarrassed. Not so the Union government. It has refused to agree to the formula proposed by a majority of the states, including Kerala, Bengal, Tamil Nadu, Bihar, Delhi, Odisha, and others. Some BJP-ruled state governments that are putting their partisan loyalty to Delhi before their own state’s interest have been the hold-outs and are in a minority. But they enjoy the support of the Union government. Thus, the stalemate continues. It is unfortunate when a 31 per cent vote share government has the power to hold at ransom the united political decision of a majority of state governments. That is a fundamental flaw in the federal structure of the Indian Union.

In the November 4 meeting of the GST council, the state Finance Ministers wanted updated data on assesses of service tax, excise, and VAT. Without giving updated data to state Finance Ministers on such crucial matters, what is the point of a GST council meeting? Was the Union government thinking that the GST council will be a tea-drinking rubber-stamp club for New Delhi’s decisions? After its fraud had been called out, the Union government tried to counter that by calling for a “re-opening” of the settled decision that states have exclusive control over the goods taxpayer base under 1.5 crore. The goods and services issues are not equivalent. The service taxpayer base issue was “settled” earlier based on false date. Updated data that shows the actual base to the nearly 3 times larger than what the Union government’s earlier misleading numbers showed has resulted in this justified calls for negotiations from a majority of the states. There has been no such corresponding fraud or concealment from the states about the goods taxpayer base.

The Union government has a rate elastic source of revenue in the form of cess. The state governments, on the other hand, after GST proposals, haven’t been left with any elastic source of revenue. Thus, Union will generate its own revenue in response to what it deems as an emergency. The states will have to go with a begging bowl to New Delhi in a similar situation. This is unjust and a blow to the powers and dignity of the states. Also, the upper slab of luxury goods, which represents a whopping 25 per cent of the total indirect tax base, has been forcibly kept low of Union government’s insistence since it wants to add cess over it, which it does not have to share with the states. Thus, the Union already wants to deprive the states from their legitimate revenue claims in the top-most tier. Either the states should also have the power to impose cess or the highest slab has to be revised upwards significantly to the squeeze the space for Union cess.

The states, by agreeing to GST, have given up exclusive revenue powers. By dangling deadlines and roll-out dates and its pressure tactics via big corporate controlled industry bodies, the Union will try to force the state into a dishonourable and damaging settlement. It is up to the states to stand up to this blackmailing coming from same Union government that can stoop so low as to mislead state governments by giving wrong information during crucial GST council meeting. This is about the future federalism in the Indian Union and preservation of the basic structure of the Constitution of India. If the state governments do not have exclusive control over any part of the taxpayer base, it will mean that the federal structure of the Indian Union will be damaged permanently. That may give result in cheers in Delhi for it will result in the economic servitude of the peoples of the states to the Central administration. In a diverse Union of peoples, federalism and democracy are not negotiable. Any Union government that misleads state government by concealing revenue data does not have any moral or ethical right to claim jurisdiction over the revenue sources situated in states. One hopes that the BJP will not be so shameless as to introduce the GST bill as a Money Bill and silence the Opposition majority in Rajya Sabha after the immense cooperation that had been extended by most of the opposition on the issue of Constitutional amendment for GST, in spite of the many reservations and concerns about GST that the Opposition had voiced during the Parliamentary debate.