India is all set to sail in its new taxation policy set out after three months of the new financial year. The move is definitely going to make a niche of its own down in history. But having said that, there are umpteen number of issues connected with its implementation in such a country as diverse as India. Still several questions remain unanswered as of yet about the consequences to be followed after its implementation. The confusions of the taxpayers on issues such as tax burden on essential goods, double taxation (cascading effect), bearing of the tax burden, etc. goes on and on. Moreover, are the implementation effects of the GST, in general, clarified enough? Won’t it lead to double taxation? Will it affect our federal system? Questions remains interminable!
The prime political confusion, as far as the left is concerned, is on the question of how our federal system is going to get affected. The main subject of disputation is over the States’ right to collect tax revenues from firms that have a turnover of up to 1.5 crores or less. The Centre urges to take over this also. GST, thus, will be a move to take away the rights of States to decide taxes according to their socio-economic situations. Whatever little vestigial powers are left for the State governments to acquire funds, as a result, all will be lost. In situations when national disasters occur or to fund welfare schemes to improve people’s livelihood, State governments will now have to remain at the foot of the Central government to avail funds.
In effect of the new reform, the States will have no rights or powers in deciding their tax structure on what rates to impose on what all commodities including on luxury goods and necessity goods. The GST, thus, will lead the State governments no way out in forming any other backup ways to collect funds to make up with accordingly to their deficits and overdrafts, something that the States have been till now relying upon hugely to cope up in accordance to their fiscal policies. With such stupendous amount of power given to the Centre to collect funds, the State governments, which is ruled by different political ideologies across, will now have to be deliberately liable to obey the interests of the Centre, which basically will be the biggest wound that could ever happen to our democratic and federal set-up.
The arguments that all these problems on the levy of GST at the Central level and the sharing of revenue with the States can be solved through the GST Council is also absurd because of the fact that the council will remain as a centrally run institution and the major stake will be in the hands of the Centre. This reduces the voices of concerns of the States in the council, thus, leading to a situation where State governments have to remain at the mercy of the Central government for funds.
A centralised arrangement has significant consequences with respect to fiscal autonomy; the States would be deprived of their important source of revenue and their right to decide the tax structure. Taking it vice versa, certain States would become more dependent on the Centre and this will lessen their responsibility and accountability towards fiscal consolidation. Also, this will make the States a mere spending unit and put a question mark on their fiscal accountability.
Being a move to unify the taxation process, however, there are significant structural, procedural and administrative issues involved in designing of the GST model in a federal system like India given the main objective of having a unified market. Indicators are that, upon all the countries that the GST is levied, no country with a federal structure has been able to have a fully harmonised system of GST.
In the Indian Scenario, where Centre is collecting 62% of the total tax revenue, assignment of GST to the Centre will increase the power of Centre to collect 83% of the overall tax revenue, leaving the States with little resources. Hence, under our present political set-up, such a proposition can never be accepted. If implemented, GST will take away the rights of States to plan their revenues. Finance Ministries, both in the States and at the Centre, will end up as distributing agencies with having no power to take policy decisions. Budgets will be mere papers and the GST council, controlled by the Centre, will be all-powerful.
The Indian model of having a GST is at two levels, one levied by the Centre (CGST) and the other by the States (SGST). But the problem under dual GST relates to vertical tax externality. This happens when both the levels of government, Centre and States, levy tax on same base. The tax policy decisions of one level of government will affect the tax base of the other. Such an impact is important in a federal structure. For instance, when the central government increase the tax rate levied on a commodity, the tax liability of taxpayers rises. In turn, the consumer reduces the demand for the commodity, which reduces the total tax amount payable to both the levels of government. This leads to a reduction in the tax base, which adversely affects tax revenue of the States as well as the Central government.
Even though the Bill will help in expanding the tax net, curbing tax evasion and increasing revenues from tax, the sacrifice of financial autonomy and State-specific financial planning by governments will be negatively affected if it becomes law. And if the concerns of the States are not taken sternly, GST will end up profiting big corporate houses. Also a unilateral approach will do no good for the country and for the federal structure.
Following demonetisation many States have reported an anticipated revenue loss in the current fiscal year. Kerala estimates that its loss would be close to 25 per cent of its average annual revenues. Given this, any agreement on concrete rates of taxation under the GST will have to factor in this loss of revenue. The crucial battle to protect the rights of States will definitely take place over these issues in the GST council. We will have to wait to see what the outcome is. Let time alone tell the tale of the new reform.
Yadul Krishna is a left activist and student of Shri Ram College of Commerce, University of Delhi.