It's not only the economics – the politics of GST is messed up too

In an October 15 election speech for the upcoming Assembly elections in Gujarat, Prime Minister Modi broke with tradition: he actually credited the Congress with something, calling the party “an equal partner in GST decisions”.

Much has been written about the pecuniary problems with the new Goods and Services tax. The backers of the GST promised that it would be a “good and simple tax” that would increase revenue collection for governments by collapsing a range of Union and state taxes into one silo. Yet, those promises look rather hollow now four months down the line. With eight different rate slabs, the new tax has thrown small and medium enterprises into a tizzy. The informal economy – which employs 67% of India’s labour force – is hit the hardest, with many now looking at shutting shop. Moreover, even the grand promise of increased revenue now looks shaky.

Yet, as Modi’s curious speech hints at, the issue isn’t economics alone. There are fundamental flaws in the politics of the GST as well. The new tax regime has now become a political football with politicians passing the buck for the hardship the new system is causing the people of India. This lack of accountability is not a quirk – it is encouraged by the GST’s decision-making structure which elides structures that would put in place political accountability so that voters are able to identity the players responsible for the taxes they pay. This gives politicians the luxury to be janus-faced – take one stand for public consumption and another in law: a disconcerting prospect for India’s political economy.

Blame game

In his October 15 speech, Modi said the decision to implement GST, “was made by governments of all political parties, including the Congress governments of Punjab, Karnataka, and Meghalaya”. The Union government was “only the 30th part” in the decision (the other 29 are the states).

Modi’s stand has a ring of hypocrisy to it given that his government has itself aggressively claimed credit for introducing the GST. Yet, his arguments are not totally untrue. The new tax regime might have been pushed aggressively by the Bharatiya Janata Party, but every other major party – with the exception the All India Anna Dravida Munnetra Kazhagam – had signed onto it.

In fact, on August 3, the Rajya Sabha passed the Constitution (122nd Amendment) Bill – a law that would put in place the constitutional framework for a GST – without a single vote being cast in opposition. The AIADMK was the only party to oppose the bill and it staged a walkout. Ironically, the two major opponents of the current GST – the Congress and the Trinamool Congress – voted amicably for the 122nd amendment in the Rajya Sabha.

Run with the hounds

How did Modi manage such a remarkable consensus – especially, given that the Congress had failed for so long before him? His trick: offering the states a rather large and juicy carrot – an incredible 14% year-on-year increase in revenue for five years. To do this, however, the GST had to be radically changed. From one flat tax, the GST was now force fitted with eight slabs in order to generate enough revenue to meet the amount promised to the states. The highest GST rate in India is a whopping 28%. To put that in perspective, Australia’s GST rate is 10%. Moreover, alcohol and petroleum were kept out of the purview of the GST since states wanted not to lose this lucrative source of tax. This ended the GST’s main draw: a simple, flat tax applied to everyone and everything.

Yet, Modi saw the agreement he had hammered out as a win and took full credit for the new tax (thus implicitly also putting himself in the firing line if things were to go wrong). The Opposition was more circumspect. Most parties had signed on to the GST, attracted by the increased revenues promised. Yet, the GST was always going to cause pain to ordinary people – even more so in its current, octa-headed avatar. Sensing an opportunity, the Trinamool Congress distanced itself from the GST – but only in its public statements. So while Mamata Banerjee railed against the “inspector raj” of the GST in Kolkata, her MPs were busy voting for the law in New Delhi. Moreover, West Bengal’s Finance Minister Dr Amit Mitra headed the GST’s Empowered Committee of State Finance Ministers and played a crucial role in getting the states on board. The Trinamool Congress, the Congress, the Rashtriya Janata Dal and the Communist Party of Indian (Marxist), in fact, boycotted the GST launch which was heralded – in Modi’s grand style – by a midnight session of Parliament, claiming that the new tax regime was flawed.

This boycott was, at the time, sharply criticised. Yet, it was a clever move. The boycotting parties would still get the money promised to their states – but the hurt it would cause to the people would only be pinned in the BJP, given that the saffron party had now taken complete ownership of the new tax in the public narrative.

Opaque decisions

This confusion was further exacerbated with the mechanism under which GST rates are decided. All decisions pertaining to the new tax are taken by a GST Council, consisting of the Union finance minister, the Union minister of state for finance and the state finance ministers.

The GST Council represents a step back for democratisation. Taxes that were earlier discussed publicly in Union and state legislatures would now be decided within a close committee whose functioning was not open to the public. This lack of accountability has meant many states have taken to grandstanding in public for lower rates. For example, West Bengal has asked for GST on sweets to be removed while Karnataka wants no tax on handmade goods. Since the public is kept in the dark on how the GST rate on sweets and handmade goods was decided upon, there is no way to know what Karnataka and West Bengal truly asked for when deciding the GST rates. And since the state are guaranteed a 14% increase in revenue, asking for cuts is a painless exercise.

The bucks stop only with the BJP and Prime Minister Modi. Again, this is not exactly unfair per se, since the BJP and its allies do control 75% of the voting strength in the Council now. So unless all the Opposition states band together, it is not possible to defeat the BJP’s proposed rates. Yet, even then, voters have a right to know how their state governments voted in the Council, much like party votes in legislatures are public. Did the Trinamool actually oppose GST rates that would hurt Bengali sweet makers given that it is opposing the GST now? Did Karnataka actually oppose a tax on handmade products? Right now, voters have no way of knowing.

Liable for their actions

This lack of accountability might be a temporary sweet spot for the Trinamool and the Congress – but it is bad news for Indian democracy. It will end up divorcing taxation – arguably the most important power of the state – from democratic politics, setting up a curious dyarchy. States – which are mostly responsible for development and service delivery – will be incentivised to promise the moon to their people without any power to actually make it happen, since all taxation powers rest with the GST council now. This will engender an irresponsible politics where a party will not be responsible for the promises it makes to the electorate.

Having tax discussions in secret is unprecedented for a democracy. Earlier, India’s tax rates were discussed and voted upon in the Union and state legislatures. In Australia, a proposed increase in the GST rate from 10% to 15% had gripped the nation’s politics and was even part of the 2016 federal election. Any change in the GST rate will require a vote in Australia’s Parliament. A similar model needs to be followed in India too, with GST rates being discussed and voted upon in Union and state legislatures, not a closed room of ministers, so Indians know who stands where.