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News: Recently, Britain witnessed Brexit because loss of some sovereign freedom in return of the economic gains of a common European market was capitalised. India may also see the “GSTExit” if the trust and faith between the centre and the state is not revived in the Union-states relationship.
Importance of GST
The GST untangled disparate taxation structures across various states, reduced transportation costs and created a unified market that would boost economic growth and yield buoyant tax revenues for everyone to share.
Issues
The 2015 GST report proclaimed that the GST would help in “making one India” through centralised GST by curtailing states’ fiscal powers. However, the GST could pave the path for the over-arching centralisation project. For example, one nation, one language”, “one nation, one religion”, “one nation, one election” etc. This seems to be anti-federalist and anti-pluralistic ideas of “one India”.
Five years after GST, Tax buoyancy has actually declined. The GST has led to fight between the Union and state governments during Covid-19.
The GST induced fiscal federalism problem has entered into other domains like the union and state governors fighting over Hindi impositions, NEET exam etc.
The GST has ruptured India’s larger federal structure and destroyed trust between the Union government and states.
What are the issues in the GST Regime?
After the introduction of the Goods and Services Tax (GST) in 2017, state governments lost their independent taxation powers. However, state had fiscal independence in liquor and fuel as both were exempted from the GST.
The share of both items in revenue generation have increased since the GST. Earlier, Both accounted for over 1/3rd of states’ own tax revenues. However, the alcohol’s share in overall state taxes has increased by 50% from the pre-GST years. In addition, Both the Union and state governments levy high fuel taxes to generate revenues as they do not have to seek permission of each other
The state governments kept liquor shops open during Covid-19 lockdowns to compensate for the loss of revenue because they had no other independent means to raise resources.
This GST framework and the fiscal independence in the fuel and alcohol domain is punishing the common Indian. For example, India has the highest fuel tax rates in the world.
The GST relies upon the foundation of “compensation guarantee” based on which states surrendered their fiscal powers in return for guaranteed revenues. This foundation is going to end and the trust deficit would plague GST.
Way Forward
The technical approach to the problem of states’ growing reliance on liquor and fuel taxes is by bringing these sin goods within the GST ambit is not the solution. The root cause lies not in economics but in politics.
Fixing GST requires a fundamental reset of the Union-states relationship. It requires a state of mutual trust and respect. Both governments should uphold the value of cooperative federalism by extending it to ethics.
India has a lot of economic, social and political diversity. Therefore, the GST was always going to be a tough proposition.
The revenue guarantee agreements between the Union and states are necessary but not sufficient to make GST tenable.
The central government should deftly balance all stakeholders and win back their confidence instead of just bringing alcohol and fuel within the GST ambit. This would further constrain the fiscal sovereignty of states.
Source: The post is based on an article “Heading for GSTExit” published in the Indian Express on 12th May 2022.
