Has Indian polity evolved enough to deliver on the aspirations of a globally integrated economy?

Is our policymaking process pragmatic and innovative? Going by the Goods and Services Tax,
the answer would, regrettably, be a straight no.

If the GST is an illustration of India's new cooperative federalism, it is indeed a very

disappointing debut. The structure of GST confirms that Indian polity could be anything but
radical. The extreme conservatism of Indian politicians coupled with the reluctance to take risks
and archaic ideas of taxation have turned GST into a non-reform.

The GST had been designed with the idea to unleash ease of doing business with a low incidence
of indirect taxation and a minimum number of tax slabs. The idea of having lower taxation and
better compliance was destined to generate higher revenues, yet timid state governments took
advantage of the desperate and reform-challenged Centre to transform GST into an insipid and
complicated project to protect their revenues.

What is more worrying is the fact that Indian polity eventually failed to deliver a radical reform
despite having a highly popular PM leading a stable government with BJPs rule in several
states.

Conservative federalism

GST was not conceived as a revenue enhancement measure at the outset. The idea of merging
several taxes (Centre and state) into one, introduction of input tax credit (the refund of tax
included in cost) and creation of a common national market had been mooted with the premise
that central and state governments will adjust their fiscal set-up to make space for a genuine low
indirect tax regime to reap the benefit of Laffer's Curve (lower tax-high consumption-high
revenues) in due course of time.

However, the premise of GST was entirely altered when it came to the political palate. State
governments forced Centre to provide them with an insurance cover (compensation package)
against any possible revenue losses on account of GST. The government then went ahead with
imposing higher tax rates and a series of cess to finance the compensation the state governments
demanded for five years after the implementation of GST.
The bias towards protecting revenues compelled the GST Council to work out dealmakers, which
were contrary to the hopes of having a low and simple taxation under the GST regime.

the Constitution Amendment Bill to create a uniform Goods and Services Tax regime is under
consideration for about a decade now. The corporates, the Centre, some state governments, some
political parties and some media organisations think this Bill is a panacea for growth. The BJP-
led government accuses the Opposition of not allowing the Bill to be passed in Parliament. But
all these groups are carefully forgetting one thing why the Bill was delayed for so long? The
reason is that this Constitution Amendment Bill makes serious threat to the essence of our
Constitution, which is federalism.
In the Constituent Assembly debates, maintaining his position that the States (then provinces)
have the right to collect Sales Tax according to their necessities, B R Ambedkar even opposed an
amendment to put a ceiling on the Sales Tax to be levied by provinces. He said while a large
number of resources on which the Provinces depend have been concentrated in the Centre, it is
desirable at least to leave one important source of revenue with the Provinces. Therefore, I
think that the proposal to leave the sales tax in the hands of the Provinces, from that point of
view, is a very Justifiable thing, he said replying to a debate on the issue in Constituent
Assembly.
He rejected an amendment that the power of the provinces to levy the sales tax should not be
free and unfettered and that there should be a ceiling fixed by Parliament and said: It seems to
me that if we permit the sales tax to be levied by the provinces, then the provinces must be free
to adjust the rate of the sales tax to the changing situation of the province, and, therefore, a
ceiling from the Centre would be a great handicap in the working of the sales tax.
The GST Bill is against this principle of our Constitution. It will ring the death bell of the
federalism in India. Without federal powers to decide taxes according to their necessities, States
will have to come with a begging bowl to the Centre frequently. This will in turn start the
process for a Presidential or an authoritarian rule of the Centre as is being envisaged by the BJP
and its ideological fountainhead, the Sangh Parivar.
This Bill subsumes State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax
levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),
Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and
State cesses and surcharges in so far as they relate to supply of goods and services. In short, not
just State governments, but local bodies will be affected by the GST proposal.
The revenue collection in 2014-15 on octroi in Mumbai Corporation was somewhere around Rs
6,733 crores which is individually around 42 per cent of the entire finance generated there. This
matter has been pointed out in the report submitted by the select committee on the GST Bill. If
the Centre wants to take that away, how development in that city can be ensured?
Taxation powers cannot be viewed only as a measure of resource mobilisation. It could be used
as a tool to control and restrict the consumption of some goods for social good. For example,
Tobacco products generally attracts huge tax rate as a measure to control the consumption on
health grounds. Here tobacco producing States argue for lesser taxes for maximum sales and the
Consumer States will demand for a leverage for fixing higher taxes. Health concerns ratify the
higher rate of tax on tobacco. Whose interest the Centre will protect, when the regime of uniform
tax rate comes? Likewise If a state government needs an additional resource mobilisation for
facing a natural calamity, it cannot decide for any special levy. Swachabharat and other Central
schemes can only be decided and used by the Central Government.
Make in India Programme is focused for strengthening and protecting the domestic industry
from foreign import. Likewise, state governments have to protect local industry and
employment. For this objective lesser sales tax and other incentives is needed for helping local
producers. But the right of state governments for variable taxation will end with the introduction
of GST regime.
The Left parties have been asking both the UPA and the NDA governments to bring clarity on
the issue of protecting federal rights. The Centre has an undemocratic veto power in the proposed
GST Council. The pleas to make distinction amongst the states in weightage is not being heard.
The weightage of the vote of the Centre should be reduced and that of the states should be
increased to ensure federal balance.
The GST will take away the rights of states to decide taxes according to their socio-economic
situations. If passed, this may create a Grexit or Brexit like situation in India, too.
The situation in Kerala is quite different than the situation in Tamil Nadu or Assam or Bihar or
West Bengal. Each state has its own socio-economic-political reasons to decide the type of tax to
be levied. The Centre is in no hurry to decide a better uniform minimum wages for the workers
in this country despite a long-standing demand by the trade unions. But to please its corporate
masters, both the BJP and the Congress want this Bill to be passed. This Bill will set a dangerous
trend against the federalism in this country.

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 thats 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 thats 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 whats in its best interest?

Opposition from States

Being a destination based tax , it is opposed by the producing hubs of the country mainly the states of
Maharashtra, Gujarat and Tamil Nadu, but since in Maharashtra and Gujarat we are having BJP
government the opposition from these 2 states were diluted by central government .

AIADMK ( Tamil Nadu)has opposed GST because of the following reasons

GST will impact on the fiscal autonomy of states and the huge permanent revenue loss .
GST Council as a constitutional body would impinge on the legislative sovereignty of
Parliament and the State Legislatures and would jeopardise the autonomy of the states in fiscal
matters.
GST councils decision making and voting right gives veto to Centre .
State wanted petroleum and petroleum products out of GST's ambit permanently.
a broad consensus on important issues such as the compensation period and methodology,
revenue-neutral rates, floor rates with bands, commodities to be excluded from GST and
clarity on dual administrative control among others.