GST @4: FUTURE UNCERTAIN
The upcoming fourth anniversary of the GST rollout is more a cause for introspection and concern than a moment of celebration. EPISODE #27
Dear Reader,
A very happy Monday to you.
This weekend the Goods and Services Tax (GST) Council held its 44th meeting. Given the threat of covid-19 pandemic it was held virtually. Mercifully the differences, which in the run up sounded ominous, did not spill over. But there is no guarantee that they will not in the future.
Increasingly politics is driving economics. Even while circumstances dictate otherwise. And in this the GST Council—the apex authority guiding this marquee piece of tax reform—is the new battleground. As always rhetoric is getting lots of play. The thing is that this is amplifying the differences along predictable political fault lines.
Ironically this adverse turn of events comes on the eve of the fourth anniversary of the GST rollout. A good time to introspect then. Accordingly this week, following up on my column from a fortnight ago, I focus on the worrying developments that could potentially derail this tax reform. Exactly whey I am writing about this concern for the second time in three weeks. I am happy to be proved wrong.
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THE GST IMBROGLIO
In little over a fortnight from now, on 1 July, the country will observe the fourth anniversary of the Goods and Services Tax (GST)—the marquee indirect tax reform, which among other things, for the first time economically unified India under the umbrella ideology of ‘One Nation, One Tax’.
Normally this would be a moment of celebration given that this was a rare example of bipartisan consensus on a very important piece of economic reform. However, growing internal differences amplified by the actions of a few states is creating fault lines within the GST Council, the apex body composed of the union and state finance ministers which guides the indirect tax reform. If not addressed immediately this could render the GST Council dysfunctional.
And it goes without saying that this would be an unmitigated disaster.
I had written about these stress points two weeks ago and hence would avoid repeating myself. (Those interested in reading it can click here.)
I will reiterate one thing though: From an idea to execution GST took 16 years and hence reflects political continuity of thought. At the very least this legacy—a very rare political commodity--should be respected.
More importantly the construct of the GST Council is such that the union and state governments have been cast in a three-legged race. Success is predated on cooperative federalism. Alternatively if they pull apart the entire edifice will come down.
What then is the problem?
Palace Intrigue?
The last few weeks has witnessed a change in tack from some of the constituents.
First off the blocks was the Congress party. Its leader Jairam Ramesh, has, in quick succession, been sharing letters addressed by Punjab FM Manpreet Badal to union Finance Minister Nirmala Sitharaman—listing out the state’s concerns on the functioning of the GST council and on the urgent need to move quickly on some long overdue overhaul of the indirect tax—on social media.
This is no coincidence. Because simultaneously the chief ministers of Congress-ruled states are making out a case of political vindictiveness by claiming that their FMs were being omitted from the several groups of ministers formed in the GST Council to address some key differences.
Bear in mind, like I said two weeks ago, the issues raised by Badal, unlike the claims of the Congress CMs, are legit. It is the provocative manner in which it is being communicated through social media which suggest that the Congress is looking for a confrontation.
To be sure this is my surmise based on circumstantial evidence. But in politics it is not what you do, but what you are seen to be doing that is the key. All the more if you keep in mind that the Congress party heir and vice president Rahul Gandhi had given the indirect tax an interesting moniker: Gabbar Singh Tax (naming it after a bandit in the cult movie Sholay.)
Interestingly, Amit Mitra, the West Bengal FM, has not been his feisty self. And this despite the fact that his party’s boss Mamata Banerjee is still in poll mode and continues to deal savage verbal blows at Prime Minister Narendra Modi and the union government. Presumably the erudite FM is keeping his powder dry and watching how things play out with a new cast taking guard in the GST Council.
On the other hand the Congress party’s ally in Tamil Nadu, Dravida Munnetra Kazhagam or DMK, has found a voluble voice in its newly anointed FM Palanivel Thiagarajan. PTR, as he is referred to, grabbed national attention in the first GST Council meeting he attended.
I had shared vignettes from the copy of his speech in the column from two weeks ago. Like Badal he too made some very relevant points (and some forgettable ones) and seemed to be inclined towards collective negotiations.
That was then. However in every public intervention since PTR has upped the ante against the union government. An excellent communicator his views are gaining traction in sections of the national media. I am not sure if many people are paying attention to the worrying aspects of the cause he is peddling: They challenge the foundations of the GST.
In his inaugural speech at the GST Council he claimed that the idea of one-state-one-vote was patently unfair.
“The “One State, One Vote” basis (with no consideration of either Population, or GSDP, or Proportion of National Production or Consumption) for the GST Council perpetrates an injustice on larger, well-developed States in multiple ways. There are far fairer and more just ways to allocate votes in the GST Council, with voting rights in proportion to membership in the Rajya Sabha as an immediate, more equitable, alternative.”
More recently he teamed up with a Congress functionary, Praveen Chakravarty, and wrote an oped in the Indian Express expanding this claim.
“The “one state one vote” model (each state, regardless of its size or contribution to the GST pool has one vote in the GST Council) causes further grave injustice. It is true that this model for the GST Council was established by the previous UPA government to incentivise states to agree to the idea of GST. It has been proven to be distortionary.”
So far most states, especially the smaller ones, have not joined issue on this. There is no guarantee they won’t. And when they do the fault lines may widen beyond repair.
The Facts
Not only are the Congress party and the Tamil Nadu FM trying to force an existential crisis on GST they are also forgetting recent economic history. Giving them the benefit of doubt I will assume for now that it is an error of omission.
To recap: The idea of one-state-one-vote was discussed threadbare in the run-up to the creation of GST. And by none other than the states themselves. This conversation happened under the aegis of the Empowered Committee of FMs held in Bhubaneswar in 2013. It was discussed in the context of the voting weightage to be accorded to the union government.
Thereafter it came up for discussion before the Select Committee of the Rajya Sabha on the Constitution (One hundred and twenty-second Amendment) Bill, 2014. This was the constitution amendment required to productionise GST and the select committee’s report enjoyed bi-partisan consensus. The committee was unambiguous in its recommendation on voting shares:
“The Committee feels that each and every state is being represented in the GST Council by their revenue/finance/taxation Minister. Be it a small state or a big state, in the GST Council, all of them enjoy equal status and power to cast one vote.”
Thereafter a fresh bid was made to revisit the clause of one-state-one-vote at the first meeting of the GST Council held on 22-23 September 2016 in New Delhi. This time the minister from Tamil Nadu (then ruled by the AIADMK) K Pandirajan was supported by the minister from Uttar Pradesh (then ruled by the Samajwadi Party) Abhishek Mishra. In fact the Tamil Nadu FM argued that a state with a population of 20 crore could not be equated to one with one crore people.
However, once again this was opposed by a majority of FMs. The minister from Meghalaya pointed out (and rightly so) that no inequality can be created among states. Similarly the minister of Arunachal Pradesh pointed out that each state played an important role in the Union and a small state like his was critical to India’s security. It was also pointed out that this matter had been resolved at the meeting of the empowered group in Bhubaneswar in 2013.
Citing the recommendation of the select committee of the Rajya Sabha the GST Council unanimously decided that “all states shall have equal vote within the two-third share (allotted to states in the Council).”
Clearly, there is no room to revisit this clause, which by the way is set in the law of the land. If you still seek to air it then there are only either of the two reasons: Either you forget your history or the intent is to provoke a cynical confrontation.
For the sake of some pending GST reform—especially with respect to reducing the multiple tax bands—one assumes it is the former.
An error of commission will be catastrophic.
Recommended Viewing/Reading
Like most people I too have been smitten by Family Man—the latest OTT offering from Amazon Prime.
But nothing prepared me for “Chellam Sir”, the character actor who makes but a guest appearance.
The character of “Chellam Sir” has taken off on social media.
Multiple memes abound about the man. At one level the Uttar Pradesh police cites him. At another the cautious trait defining the man is now a pitch for personal finance. Check this out from Money9.com.
It reminded me about the famous scene from Sholay, where the character Samba is on screen for less than four seconds and has a dialogue that is three words long (“Pure pachhas hazaar.” Yet, the character was as popular as Gabbar. Sharing a clip from YouTube; check out Samba’s cameo a little after one minute.
Till we meet again next week. Stay safe.
Dear Anil,
a detailed article on history of GST ! I agree it is the biggest tax reform in India.But the blazing controversy remains on the promised compensation to states for the shortfalls in their tax collections due to GST implementation.Also there is a discontent among the transporters due to frequent changes and increasing compliance requirements in GST e-way bills.There are complaints about increasing instances of corruption.GST is aimed in reducing corruption and sales without receipts.The increased costs of accounting software purchase has increased the operational costs for companies and their training expenses .
The picture by Sushmita of a blue antique door is very significant.Blue colour symbolises trust , calm and intelligence..The impact of GST is profound and affects different areas of economy( real estate, financial services, insurance, manufacturing etc ) differently.In the long run there will be lower inventory cost , greater revenue collection, enlarged tax base ,less tax evasion, centralised registration and greater accountability of the unorganized sector.This will benefit the Indian Economy as a whole.
The Family Man on Amazon prime is very gripping and is the most watched web series these days !!
Very informative write up Anil. The subject has not been elaborated in such details, anywhere else. Thanks. Keep up the good work.