October 17, 2021

Federalism and Economic Justice

V Sivadasan

THE Goods and Services Taxation regime is antithetical to the very idea of cooperative federalism. The rightwing is conducting an all-out campaign to impose one tax across the country ignoring the need for diversity and local autonomy.

The report submitted by the Fifteenth Finance Commission points out that in the year 2018-19, 62.7 per cent of the total tax revenue is collected by the union government. But when it comes to expenditure, 62.4 per cent of the total government expenditure is borne by the states.

This is not surprising as the states have the primary responsibility of providing public health, education and basic infrastructure. The majority of the ‘centrally sponsored schemes’ hardly meet the requirements on the ground and most of them, after the implementation of neoliberal reforms, come with conditionalities designed to arm-twist the state governments into pursuing anti welfarist politics and privatisation. Funds for the development of hospitals, inevitably come with the condition that the services should be privatised. The same is the case with the provision of other basic amenities.

Handing over the power to determine the prices of the articles of everyday consumption to union government is dangerous to democracy. India is a country with diverse geographic, cultural and economic conditions. As such, the imposition of a uniform tax regime is not beneficial for the Indian economy. Depending upon the local needs and aspirations, states should have the right to intervene in the local economy.

The GST destroys the autonomy of states to decide tax rates for goods and services within their territory. It deprives them of the ability to protect the local businesses and vulnerable sectors with differential levies and duties.

A progressive government might have to intervene, for instance, to protect the paddy cultivators. The tax structure of inputs employed in farming paddy will have to be changed accordingly. Bringing out similar changes across the country might be inefficient or even harmful. Likewise, the tax breaks enjoyed by the cultivators of staple grains for food need not be extended to the cultivation of grain for alcohol or biofuels.

The GST has resulted in a loss of power to the states for levying indirect taxes and it was acknowledged rightly by all stakeholders that this will definitely cause a dent in the state finances. This reduction in the resources available for the states is deleterious to the welfare of the people.

The majority of people are served by hospitals run by the state governments at various levels. From primary health centres to medical colleges, all levels of healthcare are managed by the state government. Of course, there are some centrally sponsored schemes, but their contribution to people’s welfare is negligible in comparison. After the implementation of new economic policy, most of them have been employed to arm-twist the state governments into introducing neoliberal policies.

In the context of Kerala, the local governments should be empowered to develop local tourist destinations and tax them for revenue which will help the local development process. However, big capitalists across the globe advocate one tax across the globe. One country one tax is the threshold to the slogan “one world one tax”.  The new system is reducing states to mere collection agents.

The finance commission was established to address this imbalance in expenditure and revenue faced by the states. Appointed by the President of India it decides the share of revenues to be shared with the states. Kerala had to suffer a double whammy even in this regard.

Out of the total taxes collected from Kerala, the state gets back only 50 per cent as central grants. In 2017, Kerala received only 52 rupees for every 100 rupees it contributed to the tax pool. The finance commission has further reduced the allocation for Kerala from the central pool, from 2.5 per cent to 1.94 per cent.

More alarming is the fact that the amount of tax allocated for distribution to the states itself is coming down. In order to do this, the Modi government has adopted a subversive technique. The central government is collecting most of its taxes as ‘cess and surcharges’ which are not shared with the states.  The collection from cess and surcharges, which was only one lakh crore in 2013-14 is expected to increase to over four lakh crore in 2020-21. It is to be noted that this increase is happening despite the decrease in the total taxes collected!


Most of this increase comes from the prices of petrol and diesel. The union taxes on the petroleum products are collected in the form of a cess, thus denying the states their due. There is a concerted campaign in the mass and social media that bringing petroleum products under GST is the only way to reduce their prices. The rightwing is actively seen peddling the logic that GST is the only way to reduce fuel prices. What is the reality? The campaign to bring petroleum products under GST is part of the centralising tendency of the current regime. The motive is to remove whatever little control states have over taxation.

The campaign that GST is a panacea suit the politics of centralisation. It defies all logic when the Union government posits that GST is the only way when in actuality a simple reduction in the cess which is the additional charge that the union government extracts could lower the petroleum prices. The refusal to go for such a reduction is baffling to any sane observer of policymaking.

Thus, for the super-rich, GST is a stone that could kill many birds at one go. On the one hand, centralisation and the one nation one tax policy will definitely favour rich corporates as it jeopardises small-scale enterprises. On the other hand, shrinking state finances will make a withdrawal from welfare functions inevitable which will open fresh pastures of profiteering for the big capital.

How could the states be cajoled into a position which was definitely disadvantageous to them? It should be seen that they were lured into by the assurance of short-term gains. The union government promised that the revenues shortfall calculated on the expected growth of 14 per cent, will be provided as compensation to the state governments. The parliament has passed the GST (Compensation to states) Act 2017 to legalise this promise. But as the compensation ends in 2022, states will find themselves in a financial quagmire again.

In India, the rights of the people over-taxation were a major plank of the struggle for Indian independence. The heroic revolt by the king of Pazhassi and many other local rulers were prompted by the clash over the right to tax. Dandi yatra and Salt satyagraha too had the protest against imposed taxation, as the central theme. The present tax regime imposed upon the country is against the perspective put forward by the leaders of the nationalist movement like Gandhi and others. The colonial concept of a centralised uniform tax system is imposed by the Sangh Parivar, by giving it the colour of aggressive nationalism.

Decentralisation and handing over powers to local self-governing institutions were seen as a mark of progress in India. But by denying the rights of local governments to tax and earn revenue, the very idea of decentralisation is being attacked. The struggle against the straitjacket of a centralised uniform tax system is essentially the struggle for deepening democracy and federalism.