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Is GST Council going to depend more on Consensus Democracy for efficiency!

TIOL - COB( WEB) - 517
SEPTEMBER 08, 2016

By Shailendra Kumar, Editor

GST is a high-decibel and high-voltage tax reform. Although the Indian Prime Minister, Mr Narendra Modi, is certainly aware of the magnitude of this mega reform but he must have realised it more acutely when President Obama congratulated him for successfully piloting the GST Bill in the Parliament on the sidelines of the G20 Summit at Hangzhou in China few days ago. The Prime Minister is back in New Delhi but he must be worried about the Constitutional Amendment Bill not being ratified by almost half of the States. The initial euphoria generated over the requirement of minimum 16 States ratifying the Bill before the same is couriered to the Rashtrapati Bhawan for the Presidential Assent, seems to have paved the way for more sensible political wisdom among the leaders. What indicates the dawn of such wisdom is the sudden call for a 'halt' even after as many 18 States have ratified the Bill and the number has decently crossed the constitutional benchmark to be met for the Presidential assent.

As per the latest inputs gathered from the corridors of realpolitik by the TIOL team, a dominant thought that has crept in the mind of the top leadership of the Government, is that the Centre should not rush for the Presidential assent and wait for ratification by some of the States, ruled by the Opposition Parties. A key manufacturing State such as Karnataka, ruled by the Congress Party, has not shown perceptible haste in approving the Bill. Tamil Nadu which had staged a walk out in the Rajya Sabha at the time of voting, is unlikely to do it as one may not see any ease in the stiff posture adopted by Amma on this issue. SP-ruled Uttar Pradesh is gearing up for assembly polls, and ratifying the GST Bill may not fit into its political agenda. SP leadership fears that it may yield some brownie points for the BJP during the polls. Mercurial and maverick Mamata Banerjee has clearly lived up to her reputation by giving last-minute 'bypass' to the agenda item set for the special session of the assembly. Kerala may be a tiny State but it has of late been quite vocal in pressing for additional concessions. Surprisingly, Mr Modi's close ally Chandra Babu Naidu has also not obliged the elated tempo of the Union Government. But TIOL has come to know that AP may approve the Bill today. Similarly, BJP's another ally the Akalis has also not shown any inclination to do it fast.

With so many key States yet to ratify the Bill, the decision of the Modi Government not to rush into seeking Presidential Assent is indeed a mature political manoeuvre. This also signifies the realisation of a majoritarian Government that what it has been bracing for by undertaking the present reform agenda is an open invitation to what is globally known as 'consensus democracy'. Although this form of democracy is largely seen as better suited for small nations such as Switzerland, Denmark, Belgium and Germany but some of its inherent advantages could perhaps be more salubrious for a hybrid GST Model like ours. Given the federal nature of the reform where each constitutionally autonomous State willingly gives up its fiscal autonomy in favour of a hybrid body which represents and aims at protecting the interests of each of its Members, Doctrine of Consensus was perhaps the best solution in the present tight scenario. That is how the GST Council is going to be the most powerful and sensitive realpolitik forum. As per the Constitutional Amendment, it is going to be only a recommendatory body so that no State should feel offended or deprived of its constitutional liberty to take decisions in its own interests but in practice, its decisions are going to be 'almost binding'. And such an authority it is going to draw not from the Constitution or any another law but from the contours of consensus democracy at play!

Let's envisage a situation which is generally being talked about is that if a particular State does not join the GST bandwagon, what would happen in that case? Let me make an attempt to find one possible answer to this question. The fact that the Constitution would stand amended as soon as the Presidential assent is obtained, the two critical terms - VAT and Sale - would cease to exist for the limited purpose of levy of tax. Irrespective of the nomenclature of the tax the levy can be imposed only on supply of goods and services. So, let's presume that the non-compliant State changes the name of the levy from VAT to SGST or anything else but continues to stick to the broad contours of the old legislation and the tax rates. In this scenario if its tax rates are higher compared to the neighbouring States, being an importing State for goods and services, it would hurt its residents (Consumers) more than others. If it exports its goods to other States, the Centre would be collecting the IGST on the same, and may keep half of it and share the rest with other States but not with the non-compliant!! Secondly, such a tax regime would drive away investments from the State as it would hurt the overall business management of an entity operating at All India level. So, going by a number of difficulties such a pariah status may create, it is unlikely that any State would like to borrow a leaf from the history of VAT implementation.

Let me now discuss another scenario. Given the fact that the GST Bill itself allows a 'Band Rate' option, one of the States may opt for a little higher rate within the band. Since the GST is a destination-based tax, any attempt to keep rates higher than the standard rate may hurt the local consumers more and it may also spell out adverse political fall-outs for the Government of the day. Secondly, it would also hurt investments in the State. Given the present race to invite investors, anything different from the 'consensus' would send a wrong signal to the industry and trade and may hurt not only investments but also job creation. Therefore, the 'Band Rate' option is unlikely to be a long-term reality. A few States may go for it as a temporary measure to shore up revenue but all the States would finally be sticking to the 'consensus tax rates'.

However, one area which may create initial hardship for the GST Council, the highest temple of consensus democracy, is going to be the scenario where certain States may decide to continue with their present bowl of subsidies to new industries. It is common to see States offering VAT waiver, cheaper industrial land, electricity tax waiver, cheaper credit and more. So far as tax waiver or tax concessions are concerned, the switching over from the present exemption regime to a new regime without hurting those industries which have gone by their concessions to set up plants and machineries, is going to be a highly tricky decision. How the Centre is going to continue with its Central Excise dole-outs to States like HP, Uttranchal and North-East is one issue but how the States would be doing it and whether it would enhance their demand for compensation from the Centre may lead to some ticklish situation for the GST Council. It would be too simple to say that the Centre would not compensate for such tax subsidies of the States but the Consensus Democracy may ultimately add an extra bout of burden on the Consolidated Fund of India.

The most vexatious issue before the GST Council is going to be a dispute between the Council itself and one of its Members. Since such a dispute is not going to be covered under the purview of the mechanism it is going to suggest for resolving disputes, what machinery is going to be set up to sort them out. Whether such a machinery is going to be a part of the GST Council's Secretariat. Whether it is going to be a Dispute Settlement Committee of officials drawn from both the Centre and the State concerned or one would be tolling the bell of the Apex Court. Whether such a committee would be a largely administrative forum like any other grievance redressal forum, and if yes, would it serve any meaningful purpose as the aggrieved party would always prefer to take rest only after knocking the door of the highest court of the land.

Anyway, no doubt, there would be innumerable difficult situations which the GST Council is going to confront after its birth but if it sticks to the underlying spirit of the consensus democracy, it would certainly overcome all difficulties by creating healthy precedents. And it appears that since it was the same underlying thought process throughout the negotiations, all the stakeholders have not gone for any in-built deterrent provisions for the errant. The law makers have not gone for penal provisions for non-compliant members since they believed that the GST would do good to all the stakeholders if implemented properly. Let's hope all the remaining States except for one or two, complete the process of ratification at the earliest so that the GST Council could be constituted. Huge delay in notifying the constitution of GST Council would displease many but more strongly Dr Hashmukh Adhia whose time-frame unfolded the other day may go topsy-turvy!!

Also See : TIOL TUBE Videos on GST

simply inTAXicating - GST RO(W)AD AHEAD - Episode 3

simply inTAXicating - GST RO(W)AD AHEAD - Episode 2

simply inTAXicating - GST RO(W)AD AHEAD - Episode 1