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(From left) Jammu and Kashmir finance minister Haseeb A. Drabu, Assam finance minister Himanta Biswa Sarma, Karnataka agriculture minister Krishna Byre Gowda, and Kerala finance minister T.M. Thomas Isaac at the Mint GST Summit in Srinagar. Photo: photographs by Waseem Andrabi/Hindustan Times
(From left) Jammu and Kashmir finance minister Haseeb A. Drabu, Assam finance minister Himanta Biswa Sarma, Karnataka agriculture minister Krishna Byre Gowda, and Kerala finance minister T.M. Thomas Isaac at the Mint GST Summit in Srinagar. Photo: photographs by Waseem Andrabi/Hindustan Times

India’s new federal compact

J&K finance minister Haseeb A. Drabu, Karnataka agriculture minister Krishna Byre Gowda, Assam finance minister Himanta Biswa Sarma, and Kerala finance minister T.M. Thomas Isaac discuss issues ranging from the situation in Kashmir to a new evolving pattern of federalism

The GST (goods and services tax) Council signed off on most of the game-changing reforms under the new tax regime at its 14th meeting held in Srinagar last month. At an event hosted by Mint on the sidelines of the meeting, Jammu and Kashmir finance minister Haseeb A. Drabu, Karnataka agriculture minister Krishna Byre Gowda, Assam finance minister Himanta Biswa Sarma, and Kerala finance minister T.M. Thomas Isaac discussed issues ranging from the situation in Kashmir to a new evolving pattern of federalism. In a panel discussion titled Scripting The New Federal Polity, moderated by Mint’s executive editor Anil Padmanabhan, the ministers said the GST Council had helped evolve a new model of cooperation among states. They also discussed topics such as challenges in the implementation of GST and the need for putting in place a template to manage the complex financial relationship between the centre and the states. Edited excerpts:

Haseeb A. Drabu

Haseeb A. Drabu. Photo: HT
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Haseeb A. Drabu. Photo: HT

Designation: Finance minister of Jammu and Kashmir

Age: 56 years

Background: Economist Haseeb Drabu has contributed to policymaking at various levels including in the erstwhile Planning Commission, the 10th Finance Commission, and as chairman and chief executive of Jammu and Kashmir Bank. Drabu hosted the crucial 14th GST Council meeting in Srinagar on 18 and 19 May that fixed GST rates for nearly all goods and services

On the changing situation in Kashmir:

The GST Council meeting in Srinagar is important for us to send a signal to the rest of the country about the state of affairs in the state. It is perhaps one of the meetings of the council which has got the highest public interest as most of the tax rates on goods and services have been decided here. We are facing a great moment in economic history.

On a new evolving pattern of federalism:

GST means a change in the federal polity of India. Replacing Planning Commission with NITI Ayog and introduction of GST represents an important landmark in the way federal India has changed. In 1991, the entire nature of economic regime changed without much consultation with any state government. I am sure the finance ministers and chief ministers of that time must have only learnt from newspapers (about) the change in the economy from a control and license raj to a market economy. Look at 2017, every single indirect tax rate is being discussed with state finance ministers. A lot of time was spent by the council discussing whether dried fish should be exempted or not. It shows the involvement of state governments in national policymaking. GST complements other measures in changing Indian federalism. Yes, there are issues of conceding sovereignty. It is not that states alone have given up powers. Centre has also given up powers. The GST Council is India’s first federal institution. We would like to see some more of such institutions. What we are looking towards is the major change in the institutional structure of Indian federalism both on the fiscal side and on the political side. The road ahead is to see India as a far more vibrant federation, moving away from coercive federalism to cooperative federalism and I do hope that in the next 10 years, we will see competitive federalism. Looking at the way state finance ministers cooperate with one another at the council, I do see the seeds of lateral federalism in India. We are moving from a classical vertical federalism towards lateral federalism.

On challenges in GST implementation:

The most important implementation question is whether businesses will pass on the benefit of reduced indirect tax burden to consumers. What is required is a very serious anti-profiteering clause.

On tackling the complex issue of financial relationship between the centre and states:

We have moved forward enormously from a stage where states would not decide their total Plan outlay before the Planning Commission approved it, to a stage where states present their budgets even before the Union Budget is presented in Parliament. We have certainty in policymaking and know the extent of our resources to do that. The 14th Finance Commission increasing the devolution of taxes to states from 32% to 42% was a landmark decision. Budgets of finance minister Arun Jaitley have tried some of the boldest experiments in democratization and decentralization of public expenditure, especially in devolving funds to panchayats. On expenditure side, states have become freer, while on revenue side, we have become a bit constrained. I can very well imagine the Union budget becoming just an expenditure document. So will state budgets become. If tax buoyancy improves, we need not be a high tax economy to fund development expenditure. States, of course, have the liberty to borrow unconstrained if they are not indebted to the Union government.

On tax rates:

The nature of regime change in indirect taxation will improve compliance. With the bulk of items in the 12-18% slabs, we are setting the stage for a single rate GST, which will be in the range of 14-15%. That is the aspiration. Wherever tax burden has been reduced, it is in line with the new socio-economic reality. A mobile phone (placed at 12% GST slab) is not a luxury today. When you place them in a lower tax slab, you are recognizing the new socio-economic reality of a growing middle class.

T.M. Thomas Isaac

T.M. Thomas Isaac. Photo: HT
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T.M. Thomas Isaac. Photo: HT

Designation: Finance minister of Kerala

Age: 64 years

Background: Thomas Isaac is a four-time member of the Kerala legislative assembly. He has represented the Alappuzha assembly constituency since 2011. Isaac served as finance minister in the previous Left Front government from 2006 to 2011. He is also a member of the central committee of the Communist Party of India (Marxist)

On a new evolving pattern of federalism:

You can have many advantages, arguments in favour of GST—that it allows seamless movement of commodities, and therefore it will encourage regional specialization and will have a positive impact on productivity but never from the point of view of federalism. Federalism has many dimensions—administrative, legislative and most importantly the fiscal autonomy of the federating units. Fiscal autonomy has two aspects to it. One, your ability to raise funds and other, spending the funds… Now the first aspect has been compromised. States today would have almost no taxation powers; the centre has also given up excise and so on but the centre will still have many more taxation powers like direct taxes, customs and also have greater ability to borrow. Fiscal maneuverability of the centre is not abridged in any manner. I support this. Having gone over VAT (value-added tax), the next logical step is GST… GST is nothing but VAT across our borders. The border barriers are removed and that’s it.

The discussions in the GST Council have been very constructive though argumentative as there are some differences. It is a very interesting tradition that has been started. When the VAT was implemented, there was no constitutional backing for it but everyone stayed in the lane due to a consensus approach. It has been an extremely liberating process.

On challenges in GST implementation:

I would like to have a different path of development. We have been focusing upon social sector, education, healthcare, welfare, social security and that is reflected in the quality of lives of the common people. This is because of a deliberate state policy which has a very important fiscal parallel to it. Now we face second-generation challenges. Given the challenges, for me, my revenue is very important. Nothing less than 20% would suffice as strategic growth. It was possible under VAT. It is very important to have buoyant revenue and this is one apprehension I have. The tax incidence on many commodities has sharply come down and one has to see the impact… The key question is: will it be passed to the consumers?

On tackling the complex issue of financial relationship between the centre and states:

I am not envying the central resources but concerned about my resources. The Finance Commission has given 42% of the devolution (of taxes) to the state, but citing this as the reason, other plans have been reduced. Total devolution to the states as a percentage of GDP (gross domestic product) is only marginal. Now GST comes in, one thing which concerns me, if you take excise and indirect taxes, the central share is only 40-45% and now under GST division is 50-50% which means the centre-state financial balance, which was already loaded against the state, will become even more. I don’t think GST will lead to any inflation because incidence of tax has come down. Only thing that stands in the way is unusual market behaviour, which will spike inflation which the centre has to control.

Himanta Biswa Sarma

Himanta Biswa Sarma. Photo: HT
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Himanta Biswa Sarma. Photo: HT

Designation: Finance minister of Assam. Also holds the portfolios of health and family welfare, education, tourism, pension and public grievances

Age: 48 years

Background: Himanta Biswa Sarma is the Bharatiya Janata Party’s (BJP’s) poster boy for the entire North-East. Sarma, who was general secretary of the Cotton College students union, is the convener of the North East Democratic Alliance. A lawyer, Sarma was a member of the Congress for a decade until he joined the BJP in September 2015.

He represents the constituency of Jalukbari, the state’s intellectual nerve centre where Guwahati University is located. Sarma was first elected to the legislative assembly from Jalukbari in 2001

On a new evolving pattern of federalism:

Regarding GST Council, often we have been asked a question by the constitutional experts, by media—whether the state autonomy has been infringed upon? But probably people have not realized that in the GST Council, it is not the states which have surrendered their authority to the GST Council, but also the centre has surrendered its authority to the GST Council...nobody asks the question to the centre about whether you have surrendered your authority. Has your autonomy gone? But actually, when we largely see the working of the GST Council, states have protected their own rights, but mostly it is the central government which has surrendered most of its authority to the majority view of the council members.

Sometimes, when the revenue secretary comes out with some idea and then when all the state finance ministers say no to it, and ultimately it is Union finance minister Arun Jaitley who always accommodates the views of the state government and it is not his own government (central government). So, if you look at the working of the GST Council, its minutes, I think the states were never disappointed and we were not disappointed yesterday and I think we will not be disappointed in the days to come… It (GST Council) is the best symbol of federal polity.

The GST Council has accommodated in the most fairest manner the viewpoint of the north-east states, Jammu and Kashmir. But while accommodating the view point of Jammu and Kashmir and the north-east states, they have also accommodated the viewpoint of the southern and coastal states. So, it has given us a very good opportunity where the federal polity was earlier described as a relationship between states and centre. But now it is not only between the centre and the states, but also the states have started mutually appreciating their own viewpoints in the GST Council. When Gujarat and Karnataka have raised the nautical mile issue on the right to tax on ocean, the north-east states and Jammu and Kashmir have supported (them) in the most vocal terms that their viewpoints have to be accommodated. And when our question of industrial exemption came, the southern and northern states, everyone supported the viewpoints of the north-east states.

Probably we have not interacted on economic issues earlier, but today we know each other’s compulsions, problems and the solutions for it. We have come here. We have become like brothers and sisters among all our states.

It (tax on dried fish) was raised by the finance minister of Manipur. But on that issue we probably spent half an hour discussing whether dry fish should be exempted or not.

So that kind of cooperation, mutual trust, mutual confidence between the states has never been witnessed. I have been in the government since 2002, I have never seen (such cooperation). Not even (in the) Planning Commission. It was a competition between the states. But now in the GST Council a new model has come out—cooperation between the states.

I think that (GST Council model) is a very, very healthy signal for India as a country. The deliberations of GST Council have opened up so many avenues for future growth of this country… I think this can be a foundation for a new India. That is what I feel as a student of political science.

The other thing that I am very impressed with is the kind of cooperation between the states. The first meetings were of competitive nature…by the 14th meeting (of the GST Council) we became friends. There is not even a single issue of confrontation between one state and another. The 14 deliberations have removed mistrust on all economic issues between the states. And this is a new thing… It will open up the opportunity for a new India. It will open up a new era of trust between the states, and it will open up a new era of trust between the centre and the states apart from what GST will bring to this country on the economic front. On the political front as well, we made a lot of gain out of these 14 deliberations in the GST Council.

On tackling the complex issue of financial relationship between the centre and states:

Regarding FRBM (Fiscal Responsibility and Budget Management) Act also, I think states have come together on the consensus, mostly on revenue. But where one state has achieved revenue targets..., should it be allowed to go a little beyond the mandate of FRBM? I think those (issues) can be (discussed) at the next level. We can again discuss in the state finance ministers’ forum. The consensus spirit which has been exhibited by the GST Council, there can be another platforms for the state finance ministers and the Union finance minister where we can discuss FRBM…and in a manner and spirit of cooperative federalism, we can also develop a new pattern on the expenditure side, including reworking FRBM wherein it will be a win-win situation both for the centre and the states.

I think the deliberations of the GST council, and the consensus which has happened in the GST Council, actually now clears the decks for a greater discussion between the centre and states on the expenditure front and the FRBM front. I think that’s the next level we should achieve and we can actually request the Union finance minister that why not create another platform or even in the GST Council once we have streamlined and stabilized the GST issues, in the next level we can discuss FRBM. We can discuss the pattern of expenditure and we can discuss the whole issue of the financial relationship between the centre and the states.

Krishna Byre Gowda

Krishna Byre Gowda. Photo: HT
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Krishna Byre Gowda. Photo: HT

Designation: Agriculture minister of Karnataka

Age: 44 years

Background: Gowda, a four-time state legislator, is a senior Congress leader who began his political career in the Indian Youth Congress. He has worked closely with the Karnataka unit of the Congress party and became a minister in the state government in 2013. Gowda holds a master’s degree in international affairs from American University, Washington D.C.

On the changing situation in Kashmir:

Thanks to Jammu and Kashmir, and the state government for the great job they have done. People of the valley are always known for their hospitality and you have outdone yourselves. We are happy to be here and pleasantly surprised. Before coming here we were wondering because the impression you get from outside the valley is that large instances of disturbance are prevailing—that is the image media has given us...yesterday I drove through the city. Yes I am not denying, there are incidents but for most parts life seems normal. My perception itself has changed a bit...

On challenges in GST implementation:

When we are making such a radical shift, I am sure there will be a few challenges; may be in the first three months, there could be issues in filing of returns or not enough awareness about process and formalities but we are making a dramatic shift in our taxation system. We have to look at the larger picture and we will see the gains.

We hope to see compliance increase. All the signs are (indicating) that. And I hope the signs materialize. GST is also one step towards cleaning up—by rationalizing things, by reducing human interference, we can get more people to comply.

On tackling the complex issue of financial relationship between the centre and states:

Quality of deliberation within the council, the quality of deliberation brought by my fellow ministers and officers—often the establishment is not given enough recognition on this point…The quality of deliberations has been phenomenal. In fact, I was pleasantly surprised when I became a member of this council, about the quality that has been brought to the issue of GST, taxation, revenue. Enormous levels of discussion have gone into this.

On tax rates:

As we finalize the rates and move into the implementation phase, I am sure there will be issues picked from cross-sections of society. I am sure people will pick on the rates and they will pick on implementation challenges also, and both are likely to be there. On the rates issue, I can assure you that if the rates have moved in any direction, in general they have moved lower, especially of commodities of common consumption. If you take the weighted average of the country and compare the new rates, you will find that the mass consumption commodities have moved to lower brackets.

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