The Whole Notion Of Federalism Is Broken, Says PTR

The slowdown in the economy has brought Centre-state relation under stress, especially when the five-year limit to give 14% compensation on revenue to states under the GST regime is coming to an end. The Tamil Nadu finance minister tells Kamalika Ghosh how the GST system can be tweaked in the interest of states.

What will states do if the Centre doesn’t prolong GST compensation period?

The GST system was opposed by many earlier. One of the greatest opponents was Narendra Modi. Another major opponent was J. Jayalalithaa, former Tamil Nadu chief minister. The reason then and now is that it removes the partial financial independence of states.

Most states were willing to give up some independence if standardisation increased the overall outcome. The numbers were bad to start with. They got worse with Covid-19. The 14% y-o-y revenue growth in an otherwise rapidly growing economy is not that complicated. But, pre-Covid-19 itself, the combined consequences of bad GST implementation plus demonetisation slowed growth for three to four years. It was a double, triple whammy by the time we got through Covid-19.

It is unimaginable how the states’ finances won’t be devastated if the GST compensation is not extended for at least the next two years. And it assumes that the third wave [of Covid-19] is much less severe and has little economic consequences compared to the earlier waves. The states like Tamil Nadu may be able to manage. But, many states will be very hard pressed, and I don't think the Union government wants it on its conscience the dire consequences that would fall upon the more hard-pressed states.

Can states flourish outside of the GST regime?

Of course. We were there before the GST. I am sure we could do without the GST. But, we want to do what's right for the country. If what's right for the people is to have a longer discussion on the GST, structural reforms and other kinds of ways, I'm all for it. I was at the GST Council meeting on December 31, where I raised issues about things that are announced and not properly executed. For example, a committee for gaming was announced in the GST Council but its six-month time frame passed without a meeting due to execution issues. The GST tries to be all things to all people, and it's probably the wrong scope on the wrong scale. Right now, everything, except things like alcohol and petroleum, is under the GST. But, maybe, things that are mostly dealt intra-state can be handled better outside the GST system.

Has the GST been good for the concept of fiscal federalism?

Compared to any other large country, India was not that great on fiscal federalism even in the constitution. Fiscally, we are much less of a federal country than either the capitalist America or the communist China. In America, states, counties and cities collect income tax. Direct sales taxes vary from county to county and district to district. In China, there is no national banking license. You have to get province by province banking licenses.

The GST system has one-state-one-vote provision, as opposed to it being based on the proportion of taxes states contribute, the size of their GDP or the size of their population. Democracy is one man, one vote, and not one state, one vote. Within the one-state-one-vote idea, it’s not possible to get something passed if the Center doesn't like it. To block something that the Center wants to be passed, about 12 to 14 states will need to get together.

In effect, the Union government has the control to pass anything it wants and stop anything it doesn’t. Smaller states or the large poorer states depend greatly on the Union for their budget through grants and schemes. It is unlikely that any of the smaller states which are dependent on the Union for transfers from the richer states will ever vote against it. The whole notion of federalism is broken because of the practicalities.

Should cess and surcharges be part of tax devolution?

They should be eliminated and the rate should be folded into the basic rate of taxation. Only then we can get the money that's due to all of us. Otherwise 20% of the total collection is being excluded from the pool of sharing.