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Union Finance Minister Nirmala Sitharaman chairs the 41st GST Council Meeting via video conferencing in New Delhi. (ANI)
Union Finance Minister Nirmala Sitharaman chairs the 41st GST Council Meeting via video conferencing in New Delhi. (ANI)

The idea of one nation, one tax is under siege

Challenges before the GST Council can only be resolved by a strong political leadership

Last week the country was witness to one the most acrimonious Goods and Services Tax (GST) Council meeting ever. Unfortunately, the outcome, far worse than anticipated, is such that the idea of ‘One Nation, One Tax’ is at risk.

It is still early to estimate the costs. But at the least, it will forsake the trust and goodwill—without which it would have been almost impossible to undertake such an ambitious indirect tax reform—so carefully cultivated through mutual give-and-take between members of the Council ever since GST was launched on 1 July 2017.

Without political intervention at the highest level, one of India’s boldest economic reform experiments—which for the first time economically unified the country—is likely to go kaput. It will be a disruption the economy in its current state will not withstand.

Worse, it is also jeopardizing the idea of “cooperative federalism" championed by Prime Minister Narendra Modi; ironically at a time when the nation, under external (unwarranted military aggression by China) and internal threats (from the covid-19 pandemic), needs to stick together.

Tragically, things have come to this pass exactly in the week of the first death anniversary of Arun Jaitley—the man who is rightly credited for seeing the complex GST experiment home. Several finance ministers had earlier tried to roll out GST but failed, precisely because they lacked his ability of carrying people together. Jaitley knew the art of bargaining: you have to give some to get some.

A principle that is sorely required to be embraced by everyone at the moment. To begin with the bureaucrats (with all due respect to them) have to be jettisoned from the conversation. Their rule book approach is precisely the reason we have missed the wood for the trees. It is beyond them to understand that the principles of federalism outweigh the need to be right by the rules in such a once-in-a-century situation.

The core of the problem is the GST dues owed to states—computed on the basis of the 14% annual growth that was guaranteed by the Union government ahead of inking the GST compact (Jaitley had called it the price the Centre had to pay for GST). The matter has been simmering and it was only time before matters came to a boil, as they did last week.

In addition, the covid-19 pandemic-induced lockdowns have caused economic havoc—one of which is manifesting in a massive tax revenue shortfall, both for the central and state governments. It was only natural that the FMs saddled with empty coffers and increasing demand for bailouts from various constituencies afflicted by the pandemic would be on a short leash.

Similarly, the Union government, which has had to step up spending to protect lives, and now has to generate funds for an economic stimulus, too, had its back to the wall.

The situation required calm political heads to be put together to address the challenge at hand. Presume if the Union government had come clean on the grim fiscal numbers before the GST Council even while it assured members that it would not renege on its commitment, matters may not have precipitated. Instead it was left to the bureaucracy, who further compounded the message with their muddled solutions and claims.

It could also be that such delicate negotiations cannot be conducted without actual face time. Jaitley, as insiders often relate, had a stock solution to defuse an inclement situation—break for tea, where he would engage in informal parleys. At present, the negotiation is being conducted through a video conversation which precludes the personal touch.

In short, the immediate task before the GST Council is three-fold.

One, a medium-term desirable, it needs to fix the flawed GST architecture drowning under the weight of myriad rates.

Second, more immediate, it has to address the monumental challenge posed by the covid-19 pandemic-induced economic meltdown on GST collections. If the economy is projected to contract 5-10% in the full year, imagine how the tax revenues are performing.

Third, related to the above, the issue involving states’ dues needs to be resolved amicably. Especially before it reaches the judicial clutches.

All three challenges require a strong political leadership and resolve. Seemingly insurmountable. But then politics is the art of the impossible.

Anil Padmanabhan is managing editor of Mint and writes every week on the intersection of politics and economics.

Comments are welcome at anil.p@livemint.com

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