After years of political gridlock, the Goods and Services Tax (122nd Constitutional Amendment bill) finally cleared the Rajya Sabha hurdle Wednesday. The passage of the bill marked a rare bonhomie between the government and the main opposition Congress, which had, until the last day, refused to see eye to eye on the bill.
The government had to bring six amendments before it secured the support of the Congress party. These changes included a more robust grievance redressal mechanism, scrapping of the 1 per cent additional tax, mandatory compensation to states for revenue loss under the new tax regime and a commitment from the government that the tax rate will be kept as low as possible. GST is said to usher in a unified tax template in the country that will mean one nation, one tax. This will subsume under it 28 indirect taxes, both state and federal.
There has been a lot of noise around the GST in India. Some have hailed it as a great milestone in India’s economic reforms after the 1991 reforms. Some said GST in India is the best thing since sliced bread. Flipkart founder Sachin Bansal went on to draw a parallel with Vallabhbhai Patel’s integration of princely sates stating GST would have a similar impact on the country’s economic integration.
However, in the shrill praise for the bill are buried its dark implications. The GST will be overseen by a council called GST Council in which the Centre will hold a third of the votes while all the sates together will hold the remaining two-third of votes. All decisions will be made with three-fourths majority. This way the Centre (with its 33 per cent weightage) will hold a veto over states.
States will have to surrender almost all their taxing rights to the Centre. This will militate against the federal character of India. In the Indian system, state governments do most of the actual governance, be it to administer the police, run schools and hospitals or to look after agriculture. If states bargain away their rights to tax, it will be a recipe for disaster. In the current system, states levy taxes and provide services.
This ensures a give and take between the government and the people. If people get better services they know they will have to pay for this extra service as there is no free lunch. GST will result in disconnect between consumers and the government. Moreover, with taxes being frozen across states, no state government will take extra interest to woo industries.
The GST Council will decide tax rates and the money will go to every state anyway. This will kill the spirit of competition between states who may not be keen to attract business.
It is obvious why the Centre and the India Inc hail the GST.
The Centre welcomes it for the simple reason that it will boost its tax kitty like never before. Unlike income tax, GST will be levied on rich and poor alike that will result in a lot of money for governments.
The way the GST Council has been envisaged, it will make the Centre more powerful as it will wield full control over the council and control tax rates in states. It is also obvious why large businesses like it. Large corporations buy and sell across the length and breadth of the country.
At present, they find it difficult to navigate a thicket of taxes. With GST, they would have to pay only one tax. The switchover to GST will mean spending big money to put in place the IT structure and the processes. A lot more will be spent to train people to run the system.
The GST might look great and glorious for large businesses and for the Centre in a short term. But if one factors in its long term implications, both economic and political, it may not be too good for India’s economy. India is not the Centre or the large corporate houses. It is much more.
