• Notification Date: 24-01-2024
• Notification No: N/A

GST is Hefty for States, RBI’s ‘solution’ is Unfair

In the run up to independence, the Cabinet Mission Plan of 1946 recommended that the states/provinces of British India have almost complete fiscal sovereignty while significantly restricting the power of the Union. This idea was favoured by Lord Mountbatten and the British colonial administration and was also acceptable to Muhammad Ali Jinnah as a step short of partition. Alas, as we now know, that did not come to pass for complicated political reasons. Jawaharlal Nehru argued for a stronger Union to help his agenda of fighting poverty with industrialisation while BR Ambedkar wanted a stronger Union to counter the threat of elite capture of local and provincial governments. 

Control over the purse, aside from its monopoly on violence, is, after all, the most significant power that a modern government has. Between the local, state, and Union governments, the degree of taxation by each layer generally determines how much of an influence that layer has on our lives. Ideally, the government closest to the people should have the maximum power while the farthest one should have the least. This principle, in fact, was a rallying cry during the American War of Independence. 

But India set up a system that skewed heavily towards the Union. States have very little power when it comes to taxation. By design, the Union controls the buoyant sources of taxation—like income tax and corporate tax. And the last vestige of freedom for states to own some indirect tax sources was taken away with the adoption of GST. 

The GST sought to unify the entire country into a single market. One may or may not agree with that intent based on whether one sees people and states as a political unit or as a market first. But beyond that, even within the strict utilitarian framework of capitalist logic, the introduction of GST has resulted in a ballooning of deficits. 

In the ten-year period before the introduction of GST, from 2005-06 to 2015-16, the combined state budgets of all Indian states had a revenue surplus on average. However, in the period since 2017, when GST was introduced, the average of all state budgets shows a revenue deficit of 0.6 per cent of GDP. One could argue the pandemic had an adverse effect, but even excluding its impact, these post-GST years show an upward trend in revenue deficits. Likewise, and as a natural corollary, they also show an upward trend in fiscal deficit.