Placating the States

Coalitions may cause a lot of problems for the Central Government but they do teach it an important lesson: the need for it to compromise and not impose its will on the States. And that is what the Centre seems to have done to facilitate the introduction of the Constitutional amendment Bill in the Lok Sabha on Tuesday. In order to carry the States along in implementing the dual Goods and Services Tax — which is the most important tax reform since Independence — the Centre has climbed down and given a voice to the States, which have been worrying over the loss of fiscal autonomy. The softening is aimed at building a consensus on the Bill. The main bone of contention in the earlier drafts of the Bill was the possibility of the Centre, acting through the Union Finance Minister, enjoying veto power on the GST rates. Faced with strong opposition on this issue, the amendment Bill has now proposed that “every decision of the GST council taken at a meeting shall be with the consensus of all the members present at the meeting”. This ought to allay the concerns of the States and may even help the Constitutional amendment to go through as the Bill also needs to be ratified by 15 State Assemblies. At least nine States, mainly BJP-ruled, have voiced their opposition to the change, fearing a loss of fiscal autonomy. The Centre, meanwhile, has to be empowered to levy the tax up to the retail stage and the States have to be empowered to levy the service tax, which they cannot at present because only the Centre can levy it.

The Bill seeks to exempt petroleum products and alcohol (for human consumption) from the GST, which leaves the tax levers with the States, and assuages their concerns. Strangely, the print media, which has not been taxed so far will be brought under GST.

The GST, if and when it comes into existence, will revolutionise the operating system of the economy. To be sure, it will (like Chinese capitalism) have Indian characteristics. For example, no other country that has the equivalent of the GST, namely, a full-fledged VAT, allows units of the federation the degree of autonomy that is being envisaged here. How this will work remains to be seen because, as India has shown with unfailing regularity, it adapts Western concepts with great success for the very good reason that it doesn't make the best the enemy of the good.

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