Business Today

GST Undermines Federal Structure

States need discretionary powers for better resource mobilisation
Issac Thomas New Delhi Print Edition: July 29, 2018
GST Undermines Federal Structure

The way GST has been designed and implemented shows how the federal structure in India is systematically undermined. The major issue in the fiscal federalism in India is the fiscal imbalance between states and the centre.

The resource mobilisation potential is concentrated with the Centre while socio-economic responsibilities are with states. Now, over time what has happened is that the states' potential of resource mobilisation has been undermined. If you look at taxes which have been subsumed by GST, 60 per cent of the taxes were collected by states and 40 per cent by the Centre. Though in some years, it was 55:45 in favour of states, but states share has always been higher. I always wanted the rate split to be 60:40, but what we have got is a 50:50 divide, which is another blow to states.

There should be some discretionary power with states for better resource mobilisation as long as it did not affect the national tax system. Now, SGST is one such tax component which has been imposed on goods and services outside the interstate trade. Therefore, it has always been a demand from people like me that there should be a provision of a narrow band of tax rate under SGST so that states can tweak it as per their need.

Let the state have some say in what way they want to grow. For example in Kerala, we have chosen a path of growth which emphasises social sector spending very similar to Nordic countries. Now if you take the tax/GDP ratio of those countries, it is anything between 35 per cent and 50 per cent. In India, it is around 20 per cent. So we have chosen a path which requires greater resource mobilisation. I agree with you that you should not disrupt the national tax system but why should I be prevented then from making my choices. Denying this is tantamount to curtailing the fiscal domain of the states.

There is another issue, where states' powers have been undermined. It has always been a unanimous demand of the states that they should be allowed to tax dealers with revenue up to Rs 1.5 crore. The logic for the same was that entities with revenue below that were exempted from excise duties under the previous tax regime. But now these dealers have been split between states and the centre. So GST has resulted in further undermining of states power, which a sensitive centre could have avoided.

If you look through the meetings of empowered committees right from the moment it started, many states had supported GST thinking that this was an occasion to rectify some of the issues states were raising since the introduction of Value-added Tax (VAT). So, I am not against national tax, but this is mechanical implementation of national tax.

So, you have on one hand FRBM Act, which curtails your expenditure and you have on the revenue side GST and also restrictions on borrowing. The government wants more restrictions on state borrowings through the 15th Finance Commission. That is again erosion of fiscal prudence of states. This is not cooperative federalism.

The only positive is that there has been a spirited give and take within the GST Council, all the more particularly due to the nature of intervention by finance minister Arun Jaitley. I hope that will continue and decisions would not be arbitrarily made in future.

But as things move on, this may change.

By Issac Thomas, Finance Minister, Kerala

As told to Dipak Mondal

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