Telling Tall Tales is a fortnightly column by Tara Krishnaswamy on matters that matter.
A few days back, the Andhra Pradesh Finance Minister, Payyavula Keshav, had to ask the GST Council to impose a flood cess. Kerala did the same in 2019. To be clear, a state that wants to raise taxes from its own residents and businesses, to handle its own problems, has to receive the approval of the Union.
Even a local Resident Welfare Association can autonomously raise money from its residents to address its water stagnation!
How did we get here? Well.. the story goes like this.
The Constitution bestows all governance of people upon state governments. They build and run schools, colleges, hospitals, transport, roads, agriculture, food supply, sanitation, power, and the police. They recruit and manage the staff and infrastructure for these services, and the state's economy, industry, and finances. Such is the cardinal position of states and the fiscal capacity they require, to service administrative burdens. A federal structure as this is not a matter of dogma; it is the only practicable solution for a vast and diverse country. Even the kings of yore administered through local tax-paying satraps.
As needs vary from state to state, so does governance and the taxes raised to finance them. Gujarat may worry about its ports, Karnataka about hosting immigrant labour, while Odisha jostles with mining and forest rights. Clearly, a centrally administered set of policies would ill-fit diverse needs. For instance, West Bengal and some other states have well-received health insurance policies, with higher coverage of their population than Ayushman Bharat.
The same is also evident with the degeneration of Swachh Bharat, a municipal or village-level function masquerading as a central scheme. A cess continues to be collected for it by the Union, but a Delhi-directed nation-wide project crumbles on the ground.
To enable the fiscal capacity of states, the Constitution bestowed tax extraction functions upon states and the Union, but the responsibility of distribution exclusively upon the latter. The Union solely appoints the Finance Commission and frames its Terms of Reference. All taxes, indirect and direct, are shared, with the exception of Union cesses and surcharges.
Unfortunately, in the past ten years, there have been a set of centralising changes that endanger the ability of states to govern themselves and flourish. First of all, the Goods and Services Tax itself. It vests tax collection or revenue generation capacity almost entirely in the Union government. This is quite contrary to the imagination of the Constitution and cuts off the legs of fiscal federalism, making states almost wholly dependent on top-down handouts.
Then, the GST process. The GST Council, the recommending authority, has one representative per state, each with one vote, and eleven votes for the two Union representatives together. From a total of 33 votes, the Union commands 33% of veto power while requiring a 3/4 majority for any recommendation to be adopted. This effectively ensures that it alone can ever prevail.
Such a design reduces states to Indian teenagers, with plenty of expenses and no income. It is also iniquitous to large states with higher populations and those that produce goods and services, assigning them the same vote weightage as small states.
Even with these constraints, parties winning the popular mandate in states could be expected to push back against a centralising GST Council, if only to slow the juggernaut. However, in the 14 states governed by the BJP, there are only a couple of Chief Ministers who led the party to victory based on their mass appeal. Most are political appointees currying favour with the party high command. (One would be hard pressed to even recall the names of the CMs of Gujarat, Odisha, Madhya Pradesh and Rajasthan.)
To add to woes, the GST process is ridden with holes. Repeated gaffes – rushed inception, multiple rate slabs, missteps with the rates, from sanitary napkins and health insurance to popcorn and used cars – reek of irregular meetings with state representatives, poor consultation and co-operation, and misplaced priorities. Ultimately, democracy guarantees a process, but the GST process suffers from malfunction. The only solace is that the GST escaped the compulsive, unutterable Hindi nomenclature.
Adding to the centralising strikes of tax extraction, there is a visible recentralisation of devolution, countermanding past trends. The 14th Finance Commission (FC), set up under the UPA-2 regime, recommended an increase of devolution from 32% to 42% to states. The 15th FC set it at 41%, but the Union reduced the divisible pool by doubling cesses and surcharges from about 10% to now, 24%, and retaining the monies for itself! This drastically reduced states' shares from 42% to 29-32% for the last 5 years!
This has been topped off with tied funds, i.e., transfers for specific Union schemes that all states must implement, even if ill-suited. Tied funds are a Union favourite, permitting the ruling party to encroach into state subjects and seize credit. For instance, 92% of all students study in schools affiliated with state boards, but the Union levies an education cess and forces NEET on states for colleges entirely within state purview!
And this is why the state cess requests are controlled by the Union, as it open the gates to fiscal autonomy, yet again. The ruling party claims to have delivered us from choppy waters to development and global aspirations, with minimum government and maximum governance. Why would a minimum Union government need to maximise its revenues by reducing states’ share? One would expect a wider berth to states as the engines of growth than ever before, but the centralising tendencies of the Union government are on an upswing!
Recentralising fiscal autonomy of states is a direct assault on people's right to self-governance. It robs the aspirations of states, making them prefectures at the hands of a nanny Union. While that may serve the political ambitions of a ruling dispensation, it stunts India's growth potential and its place in the world.
Tara Krishnaswamy is a political creature with an urge to write. She works on political and policy communication. She’s on X as: @tarauk