FOR pushing through the Goods and Services Tax (GST), the NDA government is resorting to an enormous amount of untruth. The most blatant of these is the utterly bogus claim that the GST would increase India’s GDP growth rate by 2 percent per year. If the GST had such a miraculous effect, then the world capitalist crisis would have vanished long ago, since the US, which does not have a GST, would simply have moved to a GST regime, adding to its GDP growth rate and that of the world economy as a whole. A feature of the rampant commoditisation that characterises the contemporary world is the commoditisation of research, where one can buy whatever research result one wants (like  buying a shirt or a pair of shoes) by paying a certain price for it. And this is what produces the “vulgar research”, quoted by Arun Jaitley, “showing” that a shift to GST would add 2 percent to the annual growth rate of the country.

Likewise, Jaitley told reporters after a meeting of the empowered committee of finance ministers that “virtually all states except Tamilnadu support GST” (The Hindu, June 15). What he meant by this remark is not clear, but the same report went on to say that “some states including Tamilnadu expressed reservations” about the GST Council, a key feature of the proposed arrangement. Their “reservations” spring from the fact that in the rush to adopt the GST law, demanded by the multinational corporations and domestic corporate capital, major issues relating to the federal nature of our polity are remaining unaddressed.

Before coming to these, let us look first at the arguments for the GST. Leaving aside the hype, like GDP growth will go up by so much, or revenue will increase by so much (how can anyone estimate the revenue increase when even the GST rates are not known), there are three basic arguments of substance in favour of the GST: first, that a uniform GST rate will unify the national market. Of course this uniform rate actually refers to not one but three uniform rates: one for the State Goods and Services Tax (SGST), which will be replacing the indirect taxes levied by the state governments, one for the Central Goods and Services Tax (CGST) which will be replacing the indirect taxes levied by the central government, and one for inter-state transactions (IGST). As opposed to the current fiscal regime where there is no such uniformity, the introduction of uniformity will unify the market by removing all the hurdles that the movement of goods across the country currently face in the form of differing rates at different locations.

The second argument, which is related to the first argument but is nonetheless distinct, is that uniform rates of indirect taxation on value added, as distinct from the value of sales or of production as such, simplify and rationalise the tax system. This is a virtue in itself, no matter what else it achieves. The virtue of uniformity as a simplifying and rationalising device is obvious. The virtue of taxing value added as opposed to gross value, lies in the avoidance of “cascading effects” which arise because further taxes are levied on taxes already paid earlier.

CONCEPT OF THE

CASCADING EFFECT

 An example will clarify the concept of the “cascading effect”. Suppose 1 unit of commodity A together with 1 unit of labour produces 1 unit of commodity B. Suppose the wage rate is Rs 100, the pre-tax price of 1 unit of commodity A is Rs 100, the profit margin in commodity B’s production is 20 percent and the indirect tax rate, levied on the value of output, is 10 percent each both on A and B. Then a unit of B will sell for Rs 277.2: [(Rs 100 of A+10 percent tax on it+ Rs 100 labour)(1+ 20 percent margin)(1+ 10 percent tax)]. The total tax amount will be Rs 35.2, of which Rs 10 will be from A and Rs 25.2 from B. Of this Rs 25.2 of tax paid on B, Rs 1.2 is tax that is paid on an earlier tax, because the earlier tax had raised cost and hence final price of B: ([Rs 10 of tax paid on A + profit margin of 20 percent on this Rs 10 which has raised costs] multiplied by 10 percent tax). The tax already paid in other words causes more tax to be paid, which is supposedly “irrational” since taxation should be on the level of activity, ie, on how much value is added.

A third argument consists in the obvious fact that having a uniform rate of taxation prevents state governments from competing against one another in lowering taxes to entice capital into their respective states. It prevents in other words a “race to the bottom” among states of the sort that characterises the economic policies of countries vying with one another to provide an attractive destination for investment. This is not an idle fear: there is some evidence of state governments doing so in the past.

The first two arguments however lack weight. The United States, as already mentioned, does not have a tax on Value Added of the sort that the GST represents. In other words, it merrily allows “cascading effects” to operate. At the same time it does not have a uniform tax rate, or even a uniform exemption limit in terms of the value of turnover, below which no taxation is levied. Both the rate of taxation and the exemption limit vary from one state to another. There is, in addition, a plethora of taxes, not just one or two taxes (as proposed for the GST scheme in India) whose numbers too vary from one state to another. Now, nobody can say that the United States does not have a unified national market; and if someone does say that, then the rejoinder can be made that if the world’s largest capitalist economy can afford to have a non-unified national market, then how does such non-unification matter?

Ironically, the European Union, which does have a VAT and was indeed a pioneer in the matter, is facing such acute economic hardships that its very existence is currently under threat. No doubt these hardships have little to do with its having a VAT; but what they do show is that whether or not an economy has a VAT, and a uniform one at that, is not of such great moment as far as economic performance is concerned.

But it does matter very significantly for another reason, which indeed is why the US does not have a uniform VAT. This has to do with the preservation of the federal nature of its polity. Quite obviously, a uniform tax rate for the country as a whole takes away the freedom of the states to tax as they like. It impinges seriously in other words on the powers of the state governments, and hence on the federal character of the country.

This is an issue which has so far received little attention. The entire discussion till now has been about whether the state governments will gain or lose in terms of revenue compared to the existing situation. And here the central government has assured the states that it would compensate them for any revenue loss for a period of three years.

SERIOUS ENCROACHMENT

ON THE FEDERAL STRUCTURE

But the point relates not to the revenue loss compared to the existing situation; it relates to the loss of freedom of state governments to raise revenue as they like in the future. A hallmark of our federal polity, indeed of any federal polity, is that there can be a multiplicity of political parties, different from one another, forming the different state governments. They must be allowed to put their own particular views into practice in deciding on their economic policies. Some may give tax concessions for attracting capital to undertake “development”, while others may wish to increase expenditure on welfare activities or social sectors like education and health by raising tax rates. Different state governments in other words must have the freedom to pursue (subject at most to the avoidance of the “race to the bottom” argument which I discuss below) fiscal policies of their choice. The proposed GST takes away this freedom. For any leeway in the matter of adjusting tax rates they would now have to approach the GST Council consisting of the central government, and the various state governments. This Council, where a particular state government will be only one member among many, will have the final say on whether it can adjust its tax rates.

This is a massive alteration in the federal structure of our polity. A non-constitutional body, the GST Council, consisting of the central and state government representatives, will be taking away the powers of constitutionally-formed state governments. It is an act of centralisation of powers that is so fundamental that even if all existing state governments agree to it, a moot point will still arise on whether it does not violate the “basic structure” of the constitution.

This issue of state government’s freedom to tax as they like was raised when the VAT substituted the sales tax. Amaresh Bagchi, a fiscal expert had raised the matter in an article in the Economic and Political Weekly. But in the case of VAT there were at least four different rates; what GST proposes is one single rate for the SGST, which makes matters even more serious.

If instead of a single SGST, the proposal was to have a minimum SGST rate above which the different state governments could fix their own preferred rates, then the encroachment on states’ powers would have been less, even as the question of competition among state governments to lower taxes for luring private investments into their respective states would have been addressed. But that is not what the NDA government is proposing or what the Manmohan-Chidambaram proposal had been. They too had proposed a uniform SGST rate alongside a uniform CGST rate.

Such a uniform SGST rate fixed by the GST Council is a serious encroachment on the federal structure, and it is heartening that several state governments, by raising their voices against the usurpation of states’ powers by the GST Council, are ipso facto also raising their voices against the uniform rate.