GST impasse, disempowering states

Going by recent developments, it appears that the GST roll out date slated for April 2017 will probably not be met. September 2017 seems to be the new deadline. GST, being a massive change in the indirect tax regime in the Indian Union, will be a factor whose final effects are not known and will probably not be known for some years to come. What is, of course, known is that the GST will be the single biggest blow to the autonomous revenue generation power of the states since the 1947 transfer of power. The probability that the final GST rules and structure will not be finalised in time so that the April 2017 date could have been kept is due to the impasse that has come about between the States and the Union in the meetings of the GST council. The citizens have a right know, what is this impasse and how did we get here?

In the various meetings of the GST council and public pronouncements, the Union government has taken stances and made statements that have made this impasse inevitable. Does anyone expect that in a supremely important forum like the GST council, that state Finance Ministers will be supplied with misleading data on the size of the service tax base, at best, callously, and at worst, deliberately, by the Union government? No. But that’s precisely what happened. In fact, negotiations continued, and the states ceded positions based on misleading data supplied by New Delhi. When this shameful incident became known in light of accurate data, a majority of state FinanceMinisters felt cheated. This is the sentiment that Dr Amit Mitra, the Finance Minister of West Bengal and the chairman of GST committee of state Finance Ministers, expressed when he made his frustration known publicly. Justifiably, he called for a renegotiation of the matters of service tax administration for entities with at or under 1.5 crore Rupees annual turnover, since this was negotiated on the basis of the misleading data supplied by the Union government. Arun Jaitley, the Union Finance Minister, has till date not agreed to the new and fair proposal for service tax administration that gives the Rs. 1.5 crore and under turnover entities to the state government and the over 1.5 crore Rupees turnover entities to the Union government. The GST council has an impasse because the Union government wants to disempower the states and leave the states with little manoeuvring room concerning tax administration. This is a shame.

There is no solution because the Union government wants the one where it gets what it had extracted earlier by presenting misleading data. Now, Arun Jaitley has threatened to pass the GST bill as a money bill if the stalemate continues. During the Constitutional amendment debates around GST, some MPs had wanted a commitment from Jaitley that this money bill route won't be used as a quid pro quo for the tremendous amount of goodwill that the opposition showed by giving GST a near-unanimous passage in both houses of Parliament. Arun Jaitley did not commit to that then. The reason is clear now. The state governments have walked right into this well-laid trap.

What were they thinking?

The Union government has manoeuvred the GST such that state governments are not left with any elastic source of revenue (being fixed by four tax bands) while New Delhi itself has given itself a huge source of elastic revenue by having the power to impose cess. Union government has craftily kept the highest tax band lower than it is at present, thus making a mockery of this band being the “sin” or “luxury” tax by benefitting the richest consumers. It has decided to impose the GST cess on this for which payout to states is for five years and after which this enormous pot of cess money is for the Union alone, with states foregoing massive revenue at this highest band. This is an abject surrender of the states on the question of federalism. It is not improbable that the whole GST Constitutional amendment can be challenged in court as a violation of the Basic Structure of the Constitution for one would assume that the right to change one’s tax structure is a basic autonomous right of a state in a federal polity. In addition to this, the hugely destabilising factor of demonetisation has halted economic life throughout the Indian Union. This makes most assumptions about the after-effects of GST go haywire. That matters have come to this shows the perils of having so much power concentration in the hands of the Union government in a polity so diverse as the Indian Union. Federalism not an irritant. GST needs to be renegotiated in favour of the states. The same holds for the Union and the concurrent list as they stand today.