How will Goods and Services Tax (GST) impact Centre-state relations in India?

By Muqbil Ahmar

Since the Goods and Services Tax (GST) will be a comprehensive indirect tax on manufacture, sale, as well as consumption of goods and services throughout the country, it will replace taxes collected by Central and state governments. Thus, it will remove service tax, central excise, VAT and other taxes levied locally and by state governments. Consequently, those bodies are set to lose a part of revenue.

No wonder, the tax rate for GST implementation might be nominal or zero rated for now to insulate revenues of states from the impact of the GST. Additionally, the Central Government of India has promised states of compensation for revenue losses that they incur from the date of GST introduction till a period of five years.

While experts have voiced concerns of GST eroding Parliament and state’s powers to levy taxes, India's Finance Minister Arun Jaitley has said that the taxation powers will continue to remain with state legislatures and will be used on the recommendations of the GST Council, a specialized body set up for this purpose. Under the new GST tax regime, sovereignty will be shared between the Centre and states.

"The GST idea has created a grey area (with regard to power of Centre and states)... Taxes will be jointly imposed by Centre and states, there will be one tax," Finance Minister Arun Jaitley has said in Indian Parliament.

On the other hand, eminent economist Prabhat Patnaik in an article calls out the vacuity of arguments resting their case on the concept of one unified entity:

A more serious point that is persistently made is that it would create a unified national market. It is of course absurd to suggest that India does not have a unified national market at present and must await the GST to have one; but a plethora of tax rates prevailing in different states for the same commodity does appear “irrational” at first sight. On closer reflection, however, one sees the vacuity of this argument. It would follow on these grounds for instance that even having a plethora of state governments, instead of a single national government running a unitary system, should appear “irrational”; likewise, having a parliamentary system with dispersed power centres instead of a presidential system, with a concentration of power and decision-making within one authority, should also appear “irrational”.

Losses inflicted on the states due to GST rollout

Well, the Indian Government will and should pay compensation. Moreover, the Government of India has assured states of compensation for revenue loss for the next five years. It will be effective from the date of GST implementation. The Central Government has fixed base year for GST compensation as financial year 2016.

This idea (GST) is sought to be yoked to a neo-liberal agenda of centralisation, reduction in the powers of the states and effecting regressive distributional shifts. It is important to ensure that the introduction of value-added taxation is not made to serve a neo-liberal purpose, adds Prabhat Patnaik.

Will the GST force investors to flee?

Keeping in mind, the other probable side effects of the GST rollout and implementation such as wrong cash flow, accounting, etc. some industry experts worry that the tax implementation turmoil could force investors to leave the country and drying up the foreign direct investments (FDIs).

However, there are others who opine that investors won’t leave in a hurry as the Indian economy is resilient and is in a recovery mode with institution-controlled inflation, proper fiscal consolidation, as well as low crude oil prices.

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