GST: What it Means to Federalism in the Indian Union

The Goods and Services Tax is being sold as the best thing that could happen to the system of indirect taxes in the history of the Indian Union. Simplification and streamlining of taxes, uniform taxation across the union, one integrated market, multitude of opportunities to leverage economies of scale, boost to the GDP and significance to the Make in India initiative - the benefits, we are told, are astounding. But what does it mean to the states and their diverse peoples?

A brief history of GST in the Indian Union
To begin with, let us look at the history of GST. The proposal was first made in the Union Budget speech of 2006-07. None of the states had asked for it in the first place. The Union Government, nevertheless, wanted to roll out a national-level GST. Meaning, indirect taxes like excise duty, additional excise duty, service tax etc., that fall under the purview of the Union Government, and sales tax, purchase tax, entry tax, entertainment tax etc., that come under the state governments would be subsumed under one national-level tax structure, and that would have no state component. So, the States would get no revenue from goods and services; instead the Union would own and collect all taxes and redistribute among the States.

It was then handed off to the Empowered Committee of Finance Ministers to lay the road-map for its implementation across the Union. Since there was representation of the states in the committee, the idea of national-level GST was opposed. Which state would want to lose its revenues or even the control over its revenues? Finally, a compromise was reached with the dual-GST model, which included a state component too. But as we will see further, the compromise does not necessarily restore control back to the states.

GST - Thrust upon unwilling states

The idea of GST - whether a national level GST, as it was to start with, or a dual GST, as it is being proposed as a compromise now - has come top down from the Union to the States. The States have only agreed to it as a compromise and never wanted such a structure in place. When the States did not want what gave the Union the legitimacy to impose a new taxation structure on them? Note that by legitimacy I do not mean Constitutional legitimacy; I am rather questioning the invasive and imperious attitude of the Union Government in a federal setup comprising several diverse states, each with its unique history, culture, issues and state of socio-economic development.

The AIADMK rightly pointed out the effect the GST Bill will have on the autonomy of the states. In a dissent note the party observed:

..the GST Council, as a constitutional body, impinged on the legislative sovereignty of both Parliament and the State legislature and would jeopardise the autonomy of the States in fiscal matters.

The GST Council will be setup with the passage of the Goods and Services Tax Bill. It will be headed by the Union Finance Minister with the state Finance Ministers as its members. This council will be responsible for the categorization of goods and services, and will decide the tax rates on the same. In matters pertaining to taxes and revenues, all States in the Union should abide by its orders and decisions. What democratic legitimacy and credibility will an elected body retain, when its own matters are decided by a superseding external council that is nominated? The concerns of sovereignty and autonomy of the States, expressed by the AIADMK are absolutely relevant.

No doubt, there is representation of the states in the council. The council, as already stated, will have state Finance Ministers as members. But the weightage given to the states is something to be noted. The Union Government has decided to hold a weightage of one-third of the total votes for itself, and has given two-thirds' weightage to all the states put together. With this, the Union has ensured it has veto power of sorts for itself in the council. The States, needless to say will be dummies. Barring a few exceptional cases in which a majority of States may come to a common agreement, this setup ensures the Union has total control in all matters of indirect taxation in the country.

The GST Council is anti-Federal
States that are ruled by the so called 'national' parties, usually have to toe the line of their party high-command, whose agenda is primarily focused on holding the reins of power at Delhi. The interest of the people of the State comes next to this agenda. While this will tilt the balance of power more in favour of the Union Government, those States with less influence in the Union and those ruled by state-level parties will find it much harder to influence any decisions in their favour.

It is also being said that the States can appeal to the council. But a democratically elected government going to a council for matters such as its own taxes and revenues is fundamentally opposed to the idea of democracy and federalism. A legislature elected by the people should hold these powers, not a council or a committee. It also becomes much tougher for the states to come up with and roll out any new or innovative economic policies. They all will have to operate within the limits imposed by this one framework decided by the council.

Who will really benefit from economies of scale?

I also want to address the argument of integrated market and economies of scale. Who does this benefit? It certainly benefits businesses and enterprises that are well established and have large scale inter-state operations. But what if the states want to take a different approach to nurture local entrepreneurship, for example? What autonomy will they be left with to roll-out an economic policy favouring local entrepreneurship when a uniform framework is already decided by and rolled out from a committee sitting in a far-off Delhi?

 Do we really need an integrated market? Do we really need economies of scale? Can our people leverage the so-called economies of scale effectively? These are questions that each state and its people should discuss, debate and take decisions on. Rolling out from Delhi, a single policy for diverse peoples, makes little sense. In fact, it comes with the attitude of 'I know what you need better than you do' - violating the fundamentals of free choice, liberty and democracy.

By this I do not want to sound like a conservative opposed to economic progress. In fact, in today's world, free and democratic countries have attained much stable and viable economic progress in comparison to autocratic, dictatorial or less democratic ones. The USA, termed as the epitome of free- market economy does not have a unified, integrated market. The sales taxes vary across states. In states like Alabama, Oregon, New Hampshire etc., there is no sales tax at all. In contrast, California has the highest rate of sales tax. These rates are decided by the States themselves, the Federal Government has little say in it. To add to it, the cities, the counties and other local bodies may levy additional taxes.  It is not just sales taxes, the States have their share of income tax as well, which is totally a Union subject in India. The USA has shown that a free market does not necessarily have to compromise on liberty of its people or the autonomy of its states.

Another argument in favour of GST is the ease of doing business in India, as businesses do not have to deal with different tax structures in different states. This argument too does not hold any water, when you look at countries like the United States. Despite different laws and taxation structure across different states, USA is way ahead of the Indian Union in this parameter.

Lot is being said about federalism, particularly co-operative federalism, of late. But the GST in its current form will be disastrous to the autonomy of states and the overall federal setup of the Indian Union. Here is a video recording of a talk on the same subject that I gave at Total Kannada, Jayanagar, Bengaluru, on the 13th of March. In this talk, which is in Kannada, I make the same arguments of democracy, federalism and liberty in purview of the GST bill. Comments / feedback/ discussion welcome.

A Talk on GST and Federalism

Goods and Services Tax (GST) has been one of the most debated subjects in the last several months. The introduction of GST is expected to streamline levying and collection of indirect taxes on the supply of goods and services in the Indian Union by being a comprehensive tax that will subsume several other taxes levied by both the Union and the states. By reducing the cascading effect of taxes at every stage of supply, it is expected to reduce the burden of tax, and benefit the industry as well as the common consumer. While its expected benefits are still being debated, I would like to explore the much less talked about implications of the GST: What does GST mean to the federal setup of the Indian Union? What does it mean to the Union-states relationship? What does it mean to the fiscal autonomy of the states?

Join me for a talk on this subject on Sunday, the 13th of March 2016, at Total Kannada, Jayanagar, Bengaluru. The talk titled 'GST in India's Federal System' will be in Kannada. The details of the event are here in this Facebook event invite, please confirm your presence if you are interested to attend the talk: