India lags almost all others when it comes to the devolution of fiscal powers and responsibilities to states, districts and even cities or towns, said Tamil Nadu Finance Minister Palanivel Thiagarajan at the GST Council Meeting on Friday. The Council met after seven months and addressed issues of a GST waiver on COVID-19 related essentials and medicines, the extension of the GST compensation period beyond July 2022 and more. In his speech which included the “present arrangement of the GST and its ramifications on state autonomy”, PTR said that the loss of fiscal authority and flexibility for individual states was clearly understood during its inception.
Stating that India has diverged from most countries in increasing concentration of direct and indirect taxation with the Union government, he said, “In fact, with the advent of GST, this has been taken to levels never envisioned in our Constitution.” He added, “As the report of the 15th Finance Commission notes, the promises of gains in tax buoyancy, a boost to GDP growth rates and formalisation of the economy, have all failed to materialise. If anything, the gap between large organizations and MSMEs has widened due to unequal access to technology platforms and dispute-resolution mechanisms,” he added.
He further called the GST Council a rubber stamp authority. “...the actual Council is becoming in some ways a mere ceremonial seal, a rubber-stamp authority, with the real power to create policy abrogated to (Constitutionally) ad-hoc agencies such as the TRU of the CBIC, a feeble GST Secretariat, and the quasi-governmental GST Network,” he said. “It is worth remembering that there is no Union without the states. As much as the Union is an integral (in bringing together one nation), it is also a derivative (citizens, elected representatives, and even officers of the government, each come from a state),” he added.
The Finance Minister stated that the gap between promised benefits and realisation along with their full realisation of the fears of the negative consequences of GST can be largely attributed to two causes — “Structural design and execution problems, and relationship issues between the governments of the Union and the states.” Adding that the issues of GST have been exacerbated by problems with execution, the Tamil Nadu Finance Minister called for various changes to be made, including its operational model, bringing every issue to the GST Council only and more.
“The accrual of funds into an account under the control of the Union government alone, with delays in the disbursal of accrued dues leads to frustration and resentment amongst the state governments who are forced to agitate for funds accrued to them under the law,” he said. He furthermore called the process of bringing issues to the GST Council which meets every few months “without prior discussion or attempts at consensus” as “profoundly debilitating” and called for a more efficient system.
“The GST system simply must have more continuous, efficient, and inclusive pathways towards the final step of ‘Approval by the Council’. The official level committees need to meet more regularly,” he said.
Talking about the relationship between states and the Union government, he said there has a deterioration of trust “driven by a sizeable reduction in the states’ share of taxes levied and collected by the Union government (from citizens and entities, every single one of whom is domiciled in a state), the perceived lack of “Good Faith” in the Union’s approach to states’ powers of taxation and revenue generation, and by the feeling of a lack of grace and compassion in the Union government’s approach to conciliation of differences between itself and the governments of the states – especially during the course of the COVID-19 pandemic.”
“The GST regime moved most taxes to the Union government and are centrally distributed. The Union’s seeming goodwill in raising the states’ devolution from the Divisible Pool of Taxes to 42% has been largely offset by the expansion of cesses (up 80% from Rs 1.4 lakh crore in FY ’14 to Rs 2.55lLakh crore in FY ’20),” PTR said in his speech.
Cess collected goes directly to the Union government, whereas other levies and duties go to the Consolidated Fund of India, and are then divided between the Union government and the states based on the formula devised by the Finance Commission. When the volume of cess is increased, it takes money away from states as it does not go to the central pool.
“The gradual, but eventually almost complete shift of all taxes on Petrol & Diesel from Excise to Cesses (a shift of over Rs 50,000 crore relative to FY’14 ratios of Excise & Cess, away from the Pool of Divisible Taxes, leading to a reduction of over Rs 20,000 crore - 41% of 50,000 crore – in states’ payments as share from the divisible pool) is a glaring example,” PTR stated.
Talking about the Finance Commission, he said that successive commissions have “continuously perpetrated an injustice upon developed states” by ignoring the proportion of how much tax the state gives as a factor when recommending allocations as shares from the central pool. He also raised an issue with each state receiving an equal vote, and asked for it to be “more equitable”, and suggested it be done in proportion to membership in the Rajya Sabha.
“I would like to state that we have arrived at a juncture when profound, root and branch reform of the notion of GST is the calling of the hour. Not undertaking such an effort now will put its very future at grave risk,” he added.