The Politics of GST

While GST implementation will revolutionize taxation in India, it will also upend power hierachy in the tax bureaucracy, fiscal federalism and corruption template

The goods and services tax (GST) juggernaut has now begun its journey and there is no looking back. The new tax system promises to revolutionize life for the entire value chain starting from goods and services producers all the way to consumers. But the GST also promises to upend many other established systems—such as the power hierarchy in the tax bureaucracy, the known fiscal federalism model and the prevalent corruption template. These changes, in turn, will dictate the final shape of the new tax regime.

The first signs of impending trouble can be found in the notification regarding the GST council. The press release announcing the creation of a GST council, under the provisions of the Constitution (101st Amendment) Act, 2016, states the council will be chaired by the Union finance minister, with his junior minister and finance ministers from states as members.

The fun and games begin thereafter. The secretary (revenue) in the finance ministry is the council’s ex-officio secretary, and he will be assisted by one additional secretary and four joint secretary level officers. The chairman of the Central Board of Excise and Customs (CBEC)—a body created under Central Boards of Revenue Act, 1963—has been reduced to a permanent invitee.

This has set in motion a power struggle between officers from the Indian Revenue Service (IRS) and the Indian Administrative Service (IAS) for control over the council. This is manifestly a fight to gain oversight over what will inarguably become the country’s richest financial pipeline. Although finance minister Arun Jaitley has assured IRS officers that their grievances will be heard the first round seems to have gone to IAS officers.

Similar signs of the IAS cadre inserting itself into the fiscal framework can be found in the GST Network (GSTN), an information backbone for the new tax system. The network has been set up as a not-for-profit company with shareholding from the Centre, states and financial institutions. The company’s website calls it a “non-Government, private limited company”. Both the chairman and chief executive officer’s posts are occupied by former IAS officers, as are many other board seats. Of the total 13 board members, there is only one CBEC representative.

Smooth GSTN operations will be critical to the GST’s success. A lot will hinge on registering all buyers and suppliers, calculating and crediting input tax to intermediary stage producers on time to induce more producers to register with GSTN.

Excise and customs officers have planned a series of agitations, which stretch all the way to budget day in February 2017. Interestingly, the power struggle spilled overinto the direct taxes domain in July when income-tax officers rebelled against the secretary (revenue)—this required the finance minister’s intervention.

With the oversight of the financial pipeline changing, there are no guarantees that corruption will be completely eliminated. There has been a lot of discussion on the likely corruption model that will replace the legacy structure. The earlier indirect-tax regime had many loopholes, inserted by the industrialist-politician-bureaucrat nexus. Tax experts have pointed to some gaps created at the GST’s birth. One springs from the threshold fixed for exempting goods and services from GST, Rs20 lakh, which could motivate many assessees to break up operations into an informally connected web of small units. Second, allowing states to exercise oversight over units below Rs1.5 crore annual turnover might open up another escape hatch. This is an evolving space; tax officers have already put the new code through the wringer and alerted seniors about possible loopholes.

Finally, GST has altered the fine balance of India’s federal structure by reshuffling taxation powers divided between the Centre and states in the Constitution. It is quite likely that states will attempt to regain some of this equilibrium through the GST council. The amended Act gives the council members enough powers to decide on which goods and services will be subjected to or exempted from GST, to decide the differential GST rates, and much more.

The catch is in the decision-making process. All proposals will be decided through a voting system, with the principle of one-state-one-vote. Under the voting formula, the Centre has one-third weightage of total votes cast, with the states apportioned two-thirds weightage. Any proposal needs a majority of at least three-fourths of the weighted votes cast. Assuming a full house present (quorum requirements are 50%), a Centre-sponsored proposal can succeed with 18-19 state votes.

The current National Democratic Alliance (NDA) combination rules over more than 10 states (either singly or in coalition) and has the support of three regional state governments. The fate of Arunachal Pradesh hangs in the balance. Five states—Goa, Uttarakhand, Uttar Pradesh, Manipur and Punjab—go to the polls in 2017. Another seven states will battle it out in 2018. Of the 12, if NDA manages to win six-seven, they will have enough firepower to push through proposals in the council. This gives a completely new meaning to the concept of fiscal federalism.

Intense politics preceded the birth of GST. But it would be a mistake to think that only good economics will henceforth guide the remaining workload to get GST off the ground. The real politics starts only now.

This article originally appeared as part of my column, General Disequilibrium, in Mint on October 19, 2016. It can also be read here.

India’s Disenchantment with Multilateralism

India’s initial enthusiasm for multilateralism stemmed from the belief that the global economic governance system would take on board emerging economies’ concerns

India’s decision to pull out of the South Asian Association for Regional Cooperation (Saarc) summit in Islamabad marks a new milestone in the country’s growing disaffection with regional and multilateral groupings. This discontent was most visible at the G20 summit, which it used for some unsubtle political messaging. Its near-perfunctory chairmanship of the eighth Brics (Brazil, Russia, India, China, South Africa) summit raises further questions about its interest in multilateralism.

Is there an impending shift in India’s multilateral policy framework, in much the same way that the recent “surgical strikes” pushed the strategic restraint doctrine? Will the current administration give politics greater weightage in its external policies, which till now had an economic focus? Welcome to the post-Uri policy configuration.

The future of Saarc, perennially hostage to the hyphen dividing India and Pakistan, is now further jeopardized, with Bhutan, Bangladesh, Afghanistan and Sri Lanka joining India in boycotting the Islamabad summit in November.

The low-key run-up to the eighth Brics leadership summit, scheduled on 15-16 October in Goa under India’s chairmanship, further reveals the political leadership’s fatigue with such associations. Hopefully, this will be reversed when the Brics leaders get together.

India’s stand at the latest G20 summit in Hangzhou also betrayed frustration, with Prime Minister Narendra Modi highlighting Pakistan’s export of terror. This would have seemed logical at any other global gathering, but the G20’s purpose is fostering global financial stability and economic cooperation, not airing political differences. But then, isn’t economics also about politics?

Modi’s outburst against Pakistan at a China-curated G20 summit was strategic. China has repeatedly blocked India’s attempts to enforce a UN-sponsored ban on Jaish-e-Mohammad chief Masood Azhar. In addition, Beijing is going ahead with the China-Pakistan Economic Corridor, a vital component of the One Belt, One Road initiative, which plans to pass through contested territory in Pakistan-occupied Kashmir despite India’s reservations. The last straw perhaps was China’s public opposition to India’s entry into the Nuclear Suppliers Group. India also denied China some moments of glory in Hangzhou: It refused to ratify the Paris climate accord there.

There’s also growing global disenchantment with the G20, with the weak structural engineering of this alignment now becoming slowly visible. The Hangzhou summit communique reads much like its predecessors’. It included all the well-intentioned, oft-repeated noises about policy coordination, economic growth, governance, development, inequality. Here’s the problem: The communique lacks a credible path to policy action, or any quantifiable targets. Similar communiques in the past have also helped create an atmosphere of scepticism. For example, the 2014 Brisbane summit had announced a policy framework for increasing global gross domestic product by an additional 2% by 2018, predicated on large-scale infrastructure investments. The International Monetary Fund’s staff note for the 2016 summit says the target looks unattainable because of low investment rates in most advanced economies. Consequently, analysts are rushing to publish the G20’s untimely obituary (goo.gl/57hQsn).

The G20’s shaky foundations can be traced to the circumstances of its birth. It was created in 1999—primarily as a reaction to the 1997 Asian financial crisis—as a platform for finance ministers and central bankers to discuss international financial and monetary policies, global economic trends and reform of multilateral financial institutions. In November 2008, then US president George W. Bush invited global leaders to Washington, DC to discuss a coordinated global response to the financial crisis. This became the G20’s first leadership summit, and provided the defining character of its birth: a fire-fighting unit masquerading as a global policy coordination body.

Logically, therefore, once the immediate hump of the crisis was crossed, the G20’s utility seemed diminished. Some good examples are the US’ disregard for policy coordination preceding the taper tantrum, resulting in tough times for emerging economies—and the slow progress in reforming the shareholding of Bretton Woods institutions.

The director of Globality Inc., Rebecca Liao, writes in Foreign Affairs: “Instead of coordinating economic policy among the world’s wealthiest countries, it (G20) broadened its scope to include climate change, investment initiatives, and human rights. Since its members are largely unable to come to a meaningful consensus on this expanded range of issues, the G20 then became a think tank of sorts.”

India’s enthusiasm for multilateralism stemmed from the belief that the global economic governance system would take on board the concerns of emerging economies. That hope now looks dashed, with slow progress on most issues. Add to that India’s concerns on terrorism going unheeded on global multilateral platforms. Consequently, it is quite likely that India’s policy architecture might acquire a slight bias towards bilateralism, given Modi’s predilection for one-on-one engagement with world leaders. There are also some indications of the foreign policy needle shifting slightly towards politics.

This column was originally written as an Op-Ed for Mint newspaper and can be read here