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Business News/ Politics / Policy/  Goods and services tax: A tryst with history

Goods and services tax: A tryst with history

The goods and services tax finally wins parliamentary passage as politicians bury ideological differences to vote for the seminal reform measure. MintAsia charts the course of GST and the impact it will have on the economy

The goods and services tax will establish an audit trail—based on a strong information technology backbone—on every transaction, making it extremely difficult for anyone to evade paying their share of tax dues. Photo: Saisen/ MintPremium
The goods and services tax will establish an audit trail—based on a strong information technology backbone—on every transaction, making it extremely difficult for anyone to evade paying their share of tax dues. Photo: Saisen/ Mint

New Delhi: By any yardstick, the goods and services tax (GST) is by far the most seminal tax reform undertaken by India since independence in 1947.

Consequently, the go-ahead from Parliament managed by the National Democratic Alliance (NDA), after successfully navigating through a sea of strategically placed political mines, is a real big deal.

Why so? It is not just about the idea of ‘One Nation, One Tax’. It is as much about the staggering collateral benefits that stand to accrue to India from implementing GST. And in this, there are three broad benefits: the economic unity of India: ‘one nation, one market’; hitting the reset on centre-state relations: ‘pooled sovereignty’; and, acceleration of the country’s transition to a transparent rules-based regime.

Herein lies the political economy of GST. Viewed this way, it is also easy to understand the politics which defined the opposition to this monumental tax reform initiative.

GST, which will subsume a slew of levies, was not just about altering status quo in the rights of taxation between the centre and the states, with the latter giving up a fundamental right enshrined in the Constitution. This explains the insecurity of the states, but not of the other stakeholders in the economy.

For long, India’s economic agents have thrived by exploiting an opaque and cumbersome regime, which encouraged monetization of information arbitrage and exception-based decisions by the government—the explosive cocktail which we know of as crony capitalism. The doing away with the business of industrial licensing by Prime Minister Narasimha Rao in 1991 was the beginning of the end of this regime. But to their credit, these economic agents managed to hang on to their turf for 25 years.

The implementation of GST will finally rid India of this scourge. And it will hugely complement the other baby steps the Bharatiya Janata Party (BJP)-led NDA has been taking to usher in a rules-based regime. By taking ownership of Aadhaar—the unique identity project launched by the Congress-led United Progressive Alliance (UPA)—and seeding it with subsidies (cooking gas, to begin with), the NDA sent out an unambiguous message: the days of free lunches were over ( 12,500 crore was saved in the first year by weeding out the undeserving from the cooking gas subsidy regime).

What GST is doing is taking this to another level altogether. It will establish an audit trail—based on a strong information technology backbone—on every transaction, making it extremely difficult for anyone to evade paying their share of tax dues.

What the GST does is also enlist the states as a key stakeholder; in fact, under the new arrangement, the Union government is the first among equals. This is a fundamental reset in centre-state relations, wherein we have always been used to an overbearing central government.

The proposed GST Council—probably the single most important institution of the future—apportions the votes in such a way, with one-third to the Union government and the balance among the states, that neither the centre nor the states have veto powers. Since all decisions have to be carried by a three-fourth majority, it ensures that the decisions have to be taken in a collective.

This is remarkable and builds on the decision of the 14th Finance Commission, which bumped up the share of states in net taxes of the Union government by 10 percentage points to 42%.

It also did away with the practice of tied aid—further reducing any leverage future Union governments can employ—in the form of grants and, instead, gave the states the freedom to decide how they spend their money; traditionally, it is the Union government which has driven key spending in the states even though they have far greater functional responsibilities.

Finance minister Arun Jaitley summed up the paradigm shift best when he called it “pooled sovereignty". The idea first gained currency with the formation of the European Union, wherein member-nations had to give up their individual fiscal rights to maximize the collective good. This principle very aptly defines the governance paradigm—cooperative federalism—in a new India which is an economic unity.

Significantly, just days ahead of India’s 70th Independence Day, Parliament gave its nod to the constitutional amendment bill, enabling the roll-out of GST. Ever since Independence, while India’s topographical borders have held together ensuring the country’s sovereignty, as an economy, it was balkanized.

Consequently, if a product had to move from one end of India to another, it would have to jump through a raft of tax hoops as it crossed into and out of state borders. Not only did this cause a cascading impact on taxes (as local levies were levied on existing taxes), it also created inefficiencies in the country’s manufacturing economy.

What GST will do is integrate all of India into one economic entity. At the moment, it is an idea that beats our comprehension. But to get a sense of what it means, just look at the European Union—many nations, one market. It gives the region a heft and scale, which only a few countries like Germany could aspire for individually.

It is clear then that a decade after it was first proposed, India is poised to implement the GST. What Parliament has done is only create the enabling circumstances. Now it is up to the states and the centre to ensure its actual roll-out (already both sides are bickering over what the GST rate should be). As and when they do so, it will be a litmus test for cooperative federalism.

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Published: 12 Aug 2016, 01:35 AM IST
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