DON'T KILL THE GST COUNCIL
Political grandstanding is risking the GST Council's future and India's marquee economic reform. EPISODE #25
Dear Reader,
A very happy Monday to you.
One more week and another confirmation that the worst of the second wave of covid-19 is behind us. The daily count dropped to below 2 lakh. It is still well off from the low of 20k we saw in February, yet less than half of what we were witnessing just weeks ago. The threat is far from over. In fact, going by the experience of Japan—in the throes of a fourth wave—it will be some time before we can breathe easy (pun intended).
Meanwhile the dodgy origins of the SARS-COV2 virus which causes covid-19 has now become central to American politics. This is both good and bad. The bad news is that the ensuing rhetoric can bury the truth. The good news is that it finally puts the spotlight on a long overdue question: Did the virus originate from a laboratory in Wuhan, China? The World Health Organisation, the protector of global health, has been perceived to be in dereliction of its duties in warning the world about the origin of the covid-19 pandemic. A scrutiny of its actions too are long overdue.
Back home in India a new political face off is building up. This time around the Goods and Services Tax (GST) Council. It is the body overseeing the implementation of the GST—the biggest piece of economic reform ever undertaken; something which for the first time economically unified the country. For some time now, especially after covid-19 knocked the bottom out of the Indian economy leading to massive revenue losses to the exchequer, tempers have run high in the GST Council.
Last week however this difference took an entirely new turn.
A letter addressed by Manpreet Badal, the finance minister of Punjab, to Nirmala Sitharaman, union finance minister, detailing various complaints was leaked within 24 hours. Jairam Ramesh, the Congress leader, tweeted the contents of the letter. It comes at a time when the trust quotient between the centre and some opposition ruled states is plumbing new lows; at the same time the opposition fresh from some key electoral wins is keen to deal a bloody nose to the union government.
By making an internal matter public the Congress party is raising the stakes. They also risk overplaying their hand. Unless of course it is their intent, given that their party vice president Rahul Gandhi previously dubbed it as the ‘Gabbar Singh Tax’.
The one obvious fallout of irreconcilable differences could be a dysfunctional GST Council. Not only will it jeopardise plans to recalibrate GST and make it more efficient it will also risk one big piece of reform that established a new blueprint for cooperative federalism. To be sure the contents of the letter are kosher and need to be addressed mutually. It is the politics behind the leak which is a cause for worry.
Haseeb Drabu, the former finance minister of Jammu and Kashmir, an indefatigable champion of GST and a member of the original team which drew up the new tax order, summed up the growing concerns around the future of GST best: “I am deeply distressed by this development!”
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THE GST COUNCIL SIEGE
In the run-up to the meeting of the Goods and Services Tax (GST) Council last week the political differences boiled over.
Just days ahead of the meeting Congress leader Jairam Ramesh put out a series of tweets questioning the commitment of Finance Minister Nirmala Sitharaman (the chairperson of the GST Council) and the union government to the GST cause. Ramesh was quoting from the contents of a letter sent by Punjab finance minister Manpreet Badal to Sitharaman 24 hours earlier.
It is not about the contents of the letter. Indeed they are kosher, well intended and need a speedy resolution if indeed the GST experiment is not to suffer a premature death.
It is also not about Ramesh playing politics—guess that is his dharma as an opposition politician.
Instead, the bigger concern is that what should have been discussed internally in the Council is now, thanks to a leaked letter, a case of public shadow-boxing. This will incentivise grandstanding, harden the battle lines and eschew any reasonable debate.
Worse, a few more of such orchestrated public showdowns and the GST Council will be rendered dysfunctional. Something similar to the way every session of Parliament—the mecca of Indian democracy—has been reduced to a shouting match. Often legislations are passed with barely any scrutiny or discussion. To be sure this is not a new development, but something that has become par for the course since the turn of the Millennium.
If indeed this circumstance does unfortunately pan out it will be the single biggest blow to the idea of cooperative federalism—the one mantra this country desperately needs. The GST Council is the prototype for future institutions to address the vexing trade-offs (like growth vs environment, agrarian reforms, inequality) that India will need to resolve if it has to claim its legitimate spot on the global high table.
Not to speak of reversing what is by far the most singular piece of economic reform ever attempted by India. One, which for the first time economically unified the country under the idea of ‘One Nation, One Tax’.
In short the GST Council is a national asset and has to be preserved.
The GST Legacy
Just like Rome was not built in a day, the GST was not conjured out of the hat by the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA). From idea to implementation it took most of the first two decades of this Millennium. It is therefore a terrific example of political consensus on such a singular piece of economic reform. A legacy which today is being taken for granted.
Briefly, the GST was first proposed in 2003 by the (Vijay) Kelkar Task Force on the Fiscal Responsibility and Budget Management (FRBM) Act. Kelkar, a brilliant economist and the former finance secretary, had been entrusted the task by the then NDA regime headed by Atal Bihari Vajpayee.
Thereafter it first found mention in the Union Budget of 2006-07, presented by the then finance minister P Chidambaram in the tenure of the Congress-led United Progressive Alliance (UPA). This is what Chidambaram said while presenting the budget.
“It is my sense that there is a large consensus that the country should move towards a national level GST that should be shared between the Centre and the States. I propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax.”
This was followed up by the setting up of the empowered group of state finance ministers. They were assigned the task of drawing up the architecture and implementation plan for the GST. Based on their inputs the Constitution Amendment Bill was introduced in the Lok Sabha in 2011.
However, the bill could not be productionised as the UPA was unable to assuage the fears of state governments over potential revenue loss or come up with an acceptable compensation formula. The Bill was then referred to the Standing Committee on Finance and eventually its life was extinguished with the dissolving of the 15th Lok Sabha.
With NDA claiming power in 2014, the idea of GST got fresh legs. And by December the two contentious issues had been resolved. While states would be assured a compensation for the first five years, petroleum products would be kept out of the purview of the GST till the states thought otherwise.
To a large extent this quick turnaround should be credited to Arun Jaitley. The former finance minister who passed away two years ago deployed soft skills and tough love to win over fence sitters and critics. I have heard from several state FMs that time and again he would defuse a tense face off by quickly calling for a tea break—where he would leverage his social capital with the agitated FM bilaterally.
Eventually the Constitution Amendment Bill was passed by Parliament two years later and was ratified by the President on 8 September 2016. The GST Council as we know today was formed a week later on 15 September. A year later GST was launched on 1 July at a midnight session of Parliament.
In all it had taken 16 years to pull off what is by far the biggest piece of economic reform. The last mile took 10 months and 18 meetings chaired by Jaitley.
Not only was it an exercise in continuity of economic thought it embodied unprecedented cooperative federalism. The state governments gave up their sovereign right to tax; just like Parliament conceded their purview of a substantial portion of indirect taxes and instead vested this power in the GST Council. It was, in short, an unprecedented pooling of sovereignty. And remarkably all this was managed in what was otherwise an extreme political environment.
Even better every piece of legislation was put in public domain to draw comments from all stakeholders. It was a bold attempt to approach things democratically knowing fully well that previous efforts had come to nought. The temptation to hustle things through must have been there. Guess it was the political consensus that was generated which emboldened the incumbent regime.
The tragedy is that today we are forgetting this piece of enviable history. We are turning on each other when overwhelmed by circumstances; implicitly believing that return to status quo is a better option—the most undesirable alternative. As George Santayana said in the The Life of Reason:
“Those who cannot remember the past are condemned to repeat it.”
The Present
Fast forward to today and what do we find. A house divided along the new political fault line: the BJP vs the rest.
All of a sudden politics is preceding economics, reversing the formula that had generated the consensus enabling the rollout of GST. As a result missteps from both sides have amplified the differences leading to an erosion of the trust quotient between the union government and states—providing an ideal ecosystem for trouble makers.
While the leaked letter from Badal, the FM of Punjab, was the first public salvo this time, it was not the only one. P. T. R. Palanivel Thiagarajan, the newly anointed FM of Tamil Nadu and someone who has been winning rave reviews in sections of the media echoed Badal’s sentiments in the meeting. Thiagarajan delivered an excellent speech (except for the bit where he sought scrapping of the idea of one state one vote in the GST Council) and in a measured tone—stopping short of confrontation.
“Likely forced by the speed of implementation, the structural design of the GST system has ingrained flaws, which have been revealed and exacerbated by problems of Execution.”
If you are interested in reading the entire speech please click here.
The thing is that what both FM’s are saying on record is very significant. They are underlining the fact that the existing architecture of the GST is flawed. It is constructive criticism.
They are right in saying so. It is in part the cost of consensus. Several compromises were made to address the fiscal insecurities of the states; including going in for too many rate bands—the GST Council was unable to shake off the legacy of myriad rate structure that defined the previous Value Added Tax regime.
A bigger problem has been the software managing the backend of GST. It is managed by the Good and Services Tax Network or GSTN. To give you a sense of magnitude of the task there are 8 million registered business entities on it and among other things it has to match upwards of 3 billion invoices every month. Sotto voce some FM’s have complained from the beginning that the GSTN failed to measure up; in fact the system faced a near shut down just after GST was launched.
Now FMs like Badal and Thiagarajan are breaking the ranks and airing their concerns, including the flaws in the existing GST architecture. Even better they are proffering solutions. Unfortunately opportunistic politicians who thrive on chaos are drumming up a rhetoric which will soon blur the distinction between facts and fiction in the claims of these FMs. And they risk not being heard.
The task before our politicians is clear.
First off ensure that the GST Council is not buried at the altar of petty politics. Second, seize the chance to rekindle the visionary zeal demonstrated just four years ago and combine it with pragmatism to revisit the GST architecture. Finally, resist the temptation to throw the baby out with the bathwater.
Thiagarajan summed it up best:
“As elected representatives, we will be remembered not for the margin of votes of our victories, but by the enhancements we bring to our constituents’ lives. As political parties, history will soon forget the extent of power we accumulated but remember the results of our term(s) in office – in economic growth, jobs, and the harmonious society that we nurtured during our tenure.”
Or to put it even more simply. To draw from Abraham Lincoln’s speech: In a democracy it is a government of the people, by the people, for the people,
Recommended Viewing
Last week Bharatvaarta hosted me in a nearly hour-long podcast on the second wave of covid-19. It was a freewheeling conversation on various issues, including India’s response and the role of the media. Several people who listened in appreciated the episode. Taking cue from them I take the liberty of sharing it.
It is also available on Apple podcast. Those interested in hearing it can click here. Happy viewing/listening.
Till we meet again next week. Stay safe.
All relevant aspects of the subject have been brilliantly encapsulated with skillful use of words and phrases. GST is the best solution for promotion of business and domestic growth. It cuts out needless paperwork,that does not add in any way to the product quality ; all of which can be handled centrally; cuts costs and makes operations faster. Perhaps small scale operation within a state can be exempted from GST registration. Any new paperwork is always resisted, till people become familiar with it. Mismatch of tax deposited in a volume of 3 bn invoices pm is to be expected and ways to overcome these problems have to be found. A healthy discussion with an aim to find solutions will go a long way in smoothing the rough edges and the centre has to take the lead in being more accomotative. However, due to the prevailing political climate of animosity and damaged economic position due to the pandemic, the dissenting states should not be allowed to do away with GST. It would be like doing away with internet, citing radiation and going back to the good old days of postcards and telegrams for communication. GST is a giant step forward.
Dear Anil, last week you wrote about Moderates , those who are pragmatic and see both sides of the complex issues. That is the need of the hour , especially related to GST..It has covered a long journey and many hurdles before coming to its final shape. on 1 st July 2017. Pros and cons of gst are hotly debated by the cross section of the society even today. In fact there have been strikes and Bandhs in many parts of the country following its introduction. I fully support GST and the slogan " one tax ,one nation , one market ".
with unified market and free movement of goods across the country, GST will help to create one "Economic India". Domestic economy will become more competitive , there will be more innovations, new ideas, start ups ,it is always an innovative economy which is better placed for sustained growth.It may also increase tax compliance leadind to rise in tax-GDP ratio. The "cascading Effect' of tax load on consumer will also decrease.
Yet , the flaws related to GST cannot be overlooked.petroleum products which are a significant source of revenue for state govts are out of ambit of GST. Also the operating cost of small and marginal producers has increased due to maintenance of records at all levels of sale and purchase of goods and services. Another fear is post GST prices of goods and services will rise , which contributes to inflationary spiral in the economy. Also , the Anti-profiteering Authority set up by the government should not mark the return of "Inspector Raaj " in the country.
GST should be made a landmark tax reform in India, rather than a tax regime laden with fear and apprehensions.The opposition parties should put aside their ideological differances , think of the country for a change, and implement it effectively in letter as well as spirit.
The picture gives the right message, lets hope life becomes normal soon, and the chairs are not empty but occupied by friends and family having a good time ..... will surely listen to the podcast on COVID.