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Cloak and dagger taxation

  • Published at 06:02 pm December 9th, 2016
  • Last updated at 03:14 am December 10th, 2016
Cloak and dagger taxation

The goods and services tax (GST) is a landmark tax structure change in the Indian Union that would amalgamate goods tax (levied by the state government) and services tax (levied by the Union government) into one combined tax. The rate would be uniform all across the Indian Union.

This is the single biggest tax structure reform in the Indian Union ever. The GST council is the apex body created to negotiate the final form of the GST bill. It has representation of state finance ministers and the Union government.

The crucial meeting of the GST council that was to happen on November 25 was cancelled. No new date had been finalised, as of November 24. Prior to the postponement, the GST negotiations between the state finance ministers and the Union government had hit a roadblock after it was exposed that the Union government had been concealing true data from the state finance ministers during a large part of the negotiations .

The present stalemate is around the issue of jurisdiction on the service tax-payers in the under 1.5 crore revenue category. That the Union government has presented misleading data to state finance ministers that hugely under-represents the actual tax-payer base size is a pretty serious affair.

It’s not surprising that it didn’t make the headlines given how Delhi-based think-tanks and a segment of the business media are cheering for the Union government’s side in the GST negotiations.

This sort of thing should have ended the GST negotiations altogether, but the state governments have greater faith in cooperative federalism than the Union government had.

Now, those “gains” by the Union government, based on allegedly previously concealed information, is suddenly up for negotiation and grabs.

The future of this negotiation will decide a very crucial issue of federalism in the Indian Union -- would the states retain any serious amount of revenue autonomy at all or will they become total beggars seeking alms in the court of the New Delhi empire?

Let us understand the implications of this alleged concealment of data. The crucial issue is, who will control the service tax base for entities under the 1.5 crore rupees annual revenue threshold? This is not a theoretical argument but one that is premised on numbers -- the most crucial among which is the actual size of this under 1.5 crore revenue service tax-payer base.

In the initial meeting of the GST council, service tax-payer data supplied by the Union government to the state finance ministers showed a service tax-payer base of 1.1 million.

Negotiations thus happened on the basis of this number, which the state finance ministers in good faith believed to be true.

One does not expect that in a crucial forum like the GST council, the Union government would be concealing real information and feed allegedly misleading information. Based on the 1.1 million number and its estimated revenue corpus, the states were magnanimous to the Union and decided to let the Union government retain control of the under 1.5 crore annual revenue service tax base. It turned out that this 1.1 million number that was supplied by the Union government to the state finance ministers was deemed to be misleading by them.

New data available with the state finance ministers suggest that the actual service tax-payer base with under 1.5 crore annual revenue is almost 3.1 million.

That is almost three times the number that the Union government fed the state finance ministers earlier.

A three-times increase in tax payer base has very different revenue implications. On the basis of that, a majority of the states have now proposed that for the under 1.5 crore revenue class, state governments will have full control of both goods and service taxes, while for over the 1.5 crore slab, there will be dual control and revenue sharing between the states and the Union.

Any entity whose bluff has been called out so directly would be embarrassed and would respond directly to the serious allegations that have been raised. Not so the Union government. It has refused to agree. Thus the stalemate continues.

It is unfortunate when a 31% vote share government has the power to hold at ransom the united political decision of a majority of state governments. That is a fundamental flaw in the federal structure of the Indian Union.

In a diverse union of peoples, federalism and democracy are not negotiable. Any union government that misleads state government by concealing revenue data does not have any moral or ethical right to claim jurisdiction over the revenue sources situated in states

In the November 4 meeting of the GST council, the state finance ministers wanted updated data on assesses of service tax, excise, and VAT. Otherwise, what is the point of a GST council meeting? Was the Union government thinking that the GST council will be a tea-drinking rubber-stamp club for New Delhi’s decisions?

After the state finance ministers complained, the Union government tried to counter that by calling for a “re-opening” of the settled decision that states have exclusive control over the goods tax-payer base under 1.5 crore. The goods and services issues are not equivalent.

The state governments after GST proposals, have not been left with any elastic source of revenue. Thus, Union will generate its own revenue in response to what it deems as an emergency. The states will have to go with a begging bowl to Delhi in a similar situation. This is unjust and a blow to the powers and dignity of the states.

Also, the upper slab of luxury goods, which represents a whopping 25% of the total indirect tax base, has been forcibly kept low of Union government’s insistence since it wants to add cess over it, which it does not have to share with the states.

Thus, the Union already wants to deprive states from their legitimate revenue claims in the top-most tier. Either states should also have the power to impose cess or the highest slab has to be revised upwards significantly to squeeze the space for Union cess. Otherwise, this becomes another way in which states will be deprived of their rightful revenue.

One hopes that the BJP will not be so shameless as to introduce the GST bill as a money bill and silence the opposition majority in Rajya Sabha. The states, by agreeing to GST, have given up exclusive revenue powers.

It is up to the states to stand up to this blackmailing coming from the same Union government that can allegedly mislead state governments by giving wrong information during a crucial GST council meeting. This is about the future federalism in the Indian Union and preservation of the basic structure of the constitution of India.

If the state governments do not have exclusive control over any part of the tax-payer base, it will mean that the federal structure of the Indian Union will be damaged permanently. That may give result in cheers in Delhi for it will result in the economic servitude of the peoples of the states to the New Delhi administration.

In a diverse union of peoples, federalism and democracy are not negotiable. Any union government that misleads state government by concealing revenue data does not have any moral or ethical right to claim jurisdiction over the revenue sources situated in states.

Garga Chatterjee is a political and cultural commentator. He can be followed on twitter @gargac.

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