Praveen Chakravarty writes: GST isn’t just about economic efficiency conceived by technocrats. Sustaining it requires restoring trust in the Centre-state relationship
Written by Praveen Chakravarty
May 12, 2022
“Do not drink and drive” is a general dictum in most nations. But state governments in India would rather have their citizens drink more and drive more, albeit not together. Facetious as this may sound, it is only half in jest.
After the introduction of the Goods and Services Tax (GST) in 2017, state governments lost their independent taxation powers. The only two significant avenues for states to generate their own tax revenues, without having to seek approval from the Union government, are liquor and fuel since they are outside the GST’s ambit. Alcohol and fuel combined account for over a third of states’ own tax revenues, up from a quarter before GST. Specifically, alcohol’s share in overall state taxes has increased by 50 per cent from the pre-GST years.
When the entire country was under a Covid lockdown in 2020, state governments of all political hues were forced to keep liquor shops open, since they had no other independent means to raise resources and the Union government reneged on its GST commitments. The tragic irony of state governments relying on people’s alcohol habits to manage a health crisis was an unintended consequence of the GST.
Both the Union and state governments levy high fuel taxes to garner revenues that they do not have to seek permission for or share with each other. This fiscal confrontation is punishing the common Indian with the highest fuel tax rates in the world. To put it cheekily, for the fiscal independence of state governments, GST has induced a perverse dependence on people’s driving and drinking indulgences. The solution to the problem of states’ growing reliance on liquor and fuel taxes is not to bring these sin goods within the GST ambit, as experts suggest. The roots of GST’s current woes lie not in economics but in politics. A technical approach to resolving GST’s issues through expanded coverage or rationalisation of tax rates would be myopic and futile.
Government technocrats from the Vajpayee government onwards have peddled the GST as a panacea that would untangle disparate taxation structures across various states, reduce transportation costs and create a unified market that would boost economic growth and yield buoyant tax revenues for everyone to share. They forgot that we do not live in an economy but in a society governed by politics.
The 2015 GST report by the expert committee chaired by the then chief economic adviser proudly proclaimed that the GST would help in “making one India” and waxed eloquent about the economic efficiency benefits of a centralised GST, achieved through curtailing states’ fiscal powers. This naïve technocratic endorsement of centralisation was exploited adroitly by the ruling political class to an expanded “one nation, one language”, “one nation, one religion”, “one nation, one election” flurry of anti-federalist and anti-pluralistic ideas of “one India”. It is not far-fetched to hold the view that GST may have inadvertently paved the path for the over-arching centralisation project by the Modi government in many other areas, under the garb of efficiency and uniformity.
Five years after GST, the promised economic gains are elusive. Tax buoyancy has actually declined post-GST. The Union and state governments started to fight as the money got tight. Fiscal federalism woes spilt over to other areas with state governors quarrelling with elected chief ministers, non-BJP states complaining of unfavourable treatment by the Union government during Covid, the prime minister and chief ministers bickering over protocols in government events and so on. Fuel cesses, Hindi impositions, disputes over the NEET exam and a governor rejecting a duly approved state legislation are not disparate events. They are interconnected issues involving the same political leaders and institutions. The GST has ruptured India’s larger federal structure and destroyed trust between the Union government and states. Cooperative federalism cannot just be an economic compact but a broader ethic.
India’s GST is precariously held together by the loose thread of “compensation guarantee”, under which states surrendered their fiscal powers in return for guaranteed revenues. This thread is about to snap in June. The euphoria over record GST collections in the last few months is not enough to tide over the trust deficit that plagues GST.
Fixing GST requires a fundamental reset of the Union-states relationship and nurturing it back to a state of mutual trust and respect. Given the staggering economic, social and political diversity of India’s states, GST was always going to be a tough proposition for any government or prime minister. Implicit bargains such as revenue guarantee agreements between the Union and states are necessary but not sufficient to make GST tenable. Now that India is committed down the GST path, the onus lies with the Modi government to deftly balance all stakeholders and win back their confidence, rather than thrust GST further down the states’ throats such as bringing alcohol and fuel within its ambit. This would only constrain the fiscal sovereignty of states even more and exacerbate mistrust.
The GST brouhaha is no longer just an economic issue but a larger political issue of state rights with public opinion in states like Tamil Nadu, Kerala and Punjab stacked against the idea. Merely extolling its economic benefits is not enough to convince people in these states to embrace a retooled GST.
Perhaps there is a lesson to learn from another democracy, Britain, where public opposition to losing some sovereign freedom in return for economic gains of a common European market, was capitalised by politics, eventually leading to Brexit. If the Union-states relationship and the federal structure are not rebuilt with trust and faith soon, India may have to confront its own “GSTExit”.