From delicensing to GST
4 min read 10 Aug 2016, 03:44 AM ISTWith the passage of GST, India is now the only large democracy where the states will not have independent taxing powers
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It would be unconscionably phlegmatic not to join the euphoria over the passage of the constitutional amendment that will now enable a goods and services tax (GST) regime in India. The unanimity and consensus in Parliament was historic. The Rajya Sabha voted 203 to zero and the Lok Sabha voted 443 to zero in favour of the bill. Such multi-party and absolute consensus is very rare, and not seen even when members of Parliament are voting for their own salary increases! For instance, in Maharashtra, where the state assembly voted to increase their salaries by almost 100%, some members dissented. So, the unanimous GST vote in the world’s most diverse democracy deserves a grand salute and a drumroll. The world at large, bewildered by disunity outcomes like the Brexit vote and the rise of Donald Trump, is wondering what’s going so right for India. So, let’s allow a moment for us to bask in this accolade.
Of course, there’s much work to be done before GST becomes a reality. The hurdles are not inconsiderable, and one misstep can potentially derail the enterprise. What should the GST rate be? If it is too high, it will lead to inflation. If too low, it will make states unhappy and lead to deficits. What should the dispute-resolving mechanism be? Will tax litigation mount? What should the governance within the newly formed GST council be like? Will bigger states have a bigger say? Or will smaller states rule the roost? When can we include petrol, diesel and electricity under GST? All these questions need to be resolved sooner rather than later. A determined push by all concerned can make it possible to achieve a “go live" date of 1 April 2017.
History has a mischievous sense of timing. The GST vote coincided almost to the month with the 25th anniversary of the commencement of India’s big reforms. Those reforms led to sweeping changes and had a profound impact on the economy, society and India’s standing in the world. There was nothing inevitable either about the reforms or about India’s future economic trajectory since 1991. The reforms themselves might have been pushed more by compulsion and less by ideological conviction. But that is just as well, for India’s diversity is incompatible with any ideological straitjacket anyway. This column has argued that the most important and far-reaching reform of 1991 was the dismantling of the licence-permit raj. Industrial de-licensing meant that there was no more need to get permission from Delhi to set up a new factory, expand or move an existing one. This enhanced the freedom of entrepreneurs, and took away central control. This and many of the other reforms led to deregulation and decentralization of decision-making. As the role of the centre reduced, the states had greater say. They competed for attracting new investments, first by offering fiscal incentives like sales tax holidays, and later in terms of better infrastructure. They unveiled industrial policies, textile clusters and tourism promotion measures. Many state chief ministers made pitches to investors all over the world, and some acquired reputations of being aggressively reformist, or capable doers, or even “chief executives" of their states. As the years rolled by, many commentators said that the second-generation reforms would now happen at the state level. It could be said that the 1991 reforms led to the strengthening of federalism in India.
After the 1991 reforms, India was witnessing the manifestation of centrifugal forces. It may not be a coincidence that the polity also became strongly federal with regional parties establishing a strong voter base. This centrifugal force is not inimical to the unity of India, and indeed may dilute other fissiparous tendencies. This is because Indians have a unique capability of maintaining multiple strong identities, be it linguistic, religious, racial or ethnic. So, a strong regional or linguistic identity is not contradictory to a strong national identity.
Not to put it too dramatically, the roll-out of GST is the awakening of centripetal forces. India is now the only large democracy in the world where the states will not have independent taxing powers. How will that play out? Will the states’ autonomy be eroded? It is claimed that the emerging GST council will be one of India’s most powerful federal bodies. The states, with two-thirds of the vote in the council, will have a major say in the setting and administration of taxes (GST). Even then, one cannot escape the impression that they will each have less fiscal autonomy. As someone quipped, the finance minister’s position will now no longer be a coveted one. The ability to raise tax resources independent of the GST framework is now severely curtailed. If, as promised, GST brings plentiful revenues and significantly higher gross domestic product growth, with lower inflation, this would be well worth losing that autonomy.
Many years ago, a village council in a place called Dabhol was excited by the prospect of a mega project coming up in its precincts. Innocently, it decided to impose a minuscule property tax to fund a local hospital and school. It learnt rather rudely that it had no such power. Despite its appeals all the way to higher courts, Dabhol lost. That was a lesson about its fiscal autonomy.
The economic reforms of 1991 were about letting go of control, and giving more power to decentralized entities. The big reform of 2016 is about giving up autonomy by states in exchange for an un-fragmented one country, one market, one tax vision. History seems to be moving in cycles, sometimes drifting centrifugally and sometimes centripetally.
Ajit Ranade is chief economist at Aditya Birla Group.
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