The GST Could Sound the Death Knell for Federalism in India

State governments are elected to make difficult moral decisions on how to pay for priorities and transform society – an ability the GST destroys.

Everyone likes tax reform in the abstract. Which, one suspects, is what the GST has going for it. Its promise to streamline the multiple layers of taxes and deliver India as one market is appealing, if your unit of political discourse is India. If it is your state instead, the GST sounds like the usurpation of the states’ rights and an assault on the federal structure of India. Remarkably, there has been little opposition to the GST on this ground; the AIADMK is the only major political party to have consistently raised serious objections.

The dissent note of the AIADMK by A. Navaneethakrishnan in the Select Committee’s Report that was submitted to the Rajya Sabha is worth reading. It is a blistering attack on the GST, and there has not been a coherent response from either the government or the Bill’s cheerleaders.

GST council: a flawed voting system 

The AIADMK’s fundamental problem is with the GST council. The newly formed council will resolve disputes, decide what is in the purview of the GST and fix tax rates. In effect, it decides what the GST in India will be. The dissent note rightly captures how arbitrary and poorly thought out this is:

GST Council as a constitutional body impinges on the legislative sovereignty of both Parliament and the State Legislatures. It also completely jeopardizes the autonomy of the States in fiscal matters. In spite of our repeated objections, the present Bill also envisages the formation of the GST Council. We strongly object to the provision for the GST Council.

Ideally it should not exist. The existing mechanism of the Empowered Committee of State Ministers which dealt with VAT issues is adequate. No statutory GST Council is required.

Furthermore, the decision making rule and voting weightage in the proposed Council are completely unacceptable. They give the Government of India an effective veto in the GST Council and no distinction is sought to be made amongst the States in weightage.

Quite. The central government having an effective veto makes a mockery of the council. It is also absurd that all states have exactly one vote. The express purpose of the GST Bill is to concentrate on manufacturing and achieve excellence so that the same product is not manufactured locally with sub-optimal efficiency in every state for tax reasons. That being the case, it is natural there are going to be only a few manufacturing states while the rest will be consuming states. To have a council where the manufacturing state has one vote whereas all other states, likely consumers, also have a vote each is unfair. Of course consumers will vote in their own interests. Even if we assumed the central government did not have a veto, the council’s voting and decision-making structure is deeply problematic.

Usurping the powers of states

A more fundamental question though is: what is the purpose of a state government? Why do we elect them?

Large states in India are larger than most medium-sized countries in terms of population. They elect governments expecting them to implement the political priorities of their respective societies. For instance, Tamil Nadu has a focus on welfare. The state has done remarkably well in terms of improving the health and education of its citizens over a generation. Its metrics, such as the infant mortality rate and the gross enrolment ratio in higher education, were indistinguishable from the rest of India 50 years ago. Today, they are comparable to OECD countries.

Much of this was a political choice. The Dravidian movement and its commitment to social justice as a political platform can be cited as a primary reason for this progress. Governments that were elected laid an emphasis of social spending. Sometimes they paid for it by levying new forms of indirect taxes. What the GST does is take this power away from a state government. Which makes one wonder, what are we then electing state governments for if they cannot make decisions on political priorities?

Tamil society is large and relatively prosperous today. Given that, it certainly does not elect a state government to merely achieve an efficient status quo. It elects one for making the difficult moral decisions on how to pay for priorities and transform society. What the GST does is destroy that transformative possibility at the state level. A federal structure imagines states to be policy laboratories. Those labs cannot really come up with policy experiments if they do not have the power to raise revenue and pay for it themselves. A Tamil Nadu without the difficult fiscal choices that state governments made in the past 40 years would be a poorer version of what it is now.

Is improving the efficiency of tax collection at the national level worth the political cost of condemning states to status quo policy regimes? It is possibly a fair trade off in countries with smaller populations, but India is a vastly different country in terms of its scale and diversity.

The Fiscal Responsibility and Budget Management Act that’s in place does not allow states any fiscal space. The GST Bill takes away their ability to raise additional revenue. That just leaves elected state governments with a job that’s best left to the bureaucracy – implementation. Why even have chief ministers or state elections? Is this what reform looks like? A society without an ability to determine what’s in its best interest?

Nilakantan R.S. works as a data scientist for a tech start-up and looks at politics through that vantage point.