Print Friendly, PDF & Email

Insights into Editorial: The end of the road for India’s GST?

 

 

 

Context:

The 43rd meeting of the Goods and Services Tax (GST) Council is to be held today.

Representatives of 31 States and Union Territories are expected to attend. States are dependent on GST collections for nearly half of their tax revenues.

The GST Council was mandated to meet at least once every quarter, but it had not met for two quarters, ostensibly due to the pandemic.

The post-GST era has so far witnessed exporter numerous strikes, error and mismatch in returns filed as well as the World Bank calling GST a very complex Taxation system.

However, need for a meeting to determine tax revenues for States is evidently a political decision.

 

About Cooperative Federalism:

The catchy phrase ‘cooperative federalism’ was introduced into India’s political lexicon to justify the transition to GST in 2017.

Sadly, like other catchy phrases such as ‘Minimum government, maximum governance’ and ‘Make in India’, this too has turned out to be hollow.

Cooperative federalism has a larger meaning beyond just fiscal federalism. It also entails cooperative political, administrative and governance federalism between the States and the Centre.

 

About GST Council:

  1. Article 279A: GST Council to be formed by the President to administer & govern GST.
  2. It’s Chairman is Union Finance Minister of India with ministers nominated by the state governments as its members.
  3. The council is devised in such a way that the centre will have 1/3rd voting power and the states have 2/3rd. The decisions are taken by 3/4th majority.
  4. Under the GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years between 2017 and 22.
  5. The compensation is calculated based on the difference between the states current GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.

 

Critical arguments for present GST implementation:

  1. GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year, which minimised their risks of this new experiment and compensated for their loss of fiscal sovereignty. This revenue guarantee ends in July 2022.
  2. This can lead to a crumbling of the precarious edifice on which GST stands today.
  3. In a situation where the States have no taxation powers, their GST revenues are uncertain, the supposed economic benefits seem phantom, and the hypocrisy of ‘cooperative federalism’ looms large, what is the incentive for States to continue in a GST regime?
  4. When the Prime Minister can impose a draconian lockdown in a ham-fisted manner without consultation or play favourites with critical oxygen supplies during an emergency, there seems very little motivation for the States to cooperate in a chase for an elusive economic goal by sacrificing their significant economic powers of taxation.
  5. The 15th Finance Commission report formally acknowledges that GST has been an economic failure that did not deliver on its early promises.
  6. GST, as postulated by technocrats, was supposed to be the panacea for India’s throttled economy to deliver enormous economic efficiency gains, improve tax buoyancy and collections, boost GDP growth and usher in greater formalisation of the economy.
  7. Three years after its launch and even before COVID-19, GST had failed on all those promises.

 

Presently, Problems underpinning GST:

  1. Economists and commentators point to the multiple rates structure, high tax slabs and the complexity of tax filings as the problems underpinning India’s GST.
  2. These were indeed the initial problems in the way GST was implemented, leading to some of its current woes.
  3. But now, GST has a more fundamental problem: the erosion of ‘trust’ and ‘trustworthiness’ between the States and the Centre.
  4. Technical fixes such as simplification of GST rates and tax filing systems to restore GST to its initial promise is akin to applying a pain balm to an injury that needs surgery.
  5. The States paid a huge price for GST in terms of loss of fiscal autonomy.
  6. The promised economic gains are invisible, and India’s federalism has been ruptured.

 

The Trust Game and Trustworthiness:

  1. The GST Council is not an inanimate economic body. It is a compact of trust between the States and the Centre, set in the larger context of India’s polity.
  2. Behavioural economists, such as the Nobel Laureate, Daniel Kahneman, have articulated the critical role of the twin attributes of ‘trust’ and ‘trustworthiness’ among heterogeneous participants in an economy.
  3. Using a tool called ‘The Trust Game’, they have demonstrated that the motive of ‘altruism’ leads to the most optimal economic outcome for everyone in the group while a motive of ‘spite’ leads to the worst outcome for all.
  4. The tragedy of the GST Council is that it is afflicted with spite and forced to function under the prevailing cloud of vendetta politics.
  5. With elections to another seven States due next year, GST revenue numbers could change dramatically again.
  6. If the functioning of the GST Council is subject to the vagaries of elections and consequent vendetta politics, GST will continue to be just a caricature of its initial promise.

 

Conclusion:

Critics argue that striking a balance among diverse interests of India’s numerous parties in a larger political climate of spite and suspicion to arrive at a uniform tax policy for the nation is a near impossibility.

The tapestry of India’s GST was stitched on a fabric of implicit trust and painted with vibrant economic colours.

The fabric is now torn and the colours have faded. The loose thread of guaranteed revenues that holds this together is about to snap.

The end of India’s grand GST experiment seems inevitable unless there is a radical shift in the tone and tenor of India’s federal politics, backed by an extension of revenue guarantee for the States for another five years.

Thus, GST is a positive step towards shifting Indian economy from the informal to formal economy.

It is important to utilise experiences from global economies that have implemented GST before us, to overcome the impending challenges.