States should be given powers over direct taxes, extending income guarantee, says Praveen Chakravarty, chair of Congress’s Data Analytics division. Praveen Chakravarty, chair of Congress’s Data Analytics division, was an early critic of the Goods and Services Tax (GST) regime. He considers restoring trust between the States and the Center essential for smoothly continuing the GST system—edited excerpts from an interview. The GST council will meet in Chandigarh on Tuesday and Wednesday, while the tax system will go into effect on June 30 for five years—Market principle.
You were skeptical when the GST regime was rolled out. Do you feel justified?
I wish I had been proven wrong. My view of GST was shaped by my understanding of federalism and by using an economic lens. Indian states are very diverse economically except politically diverse. GST was an outcast in India. India has political parties that are limited to the borders of certain conditions. I underestimated the ill effects of GST in my original critique. They have only worsened over the past five years, partly due to other centralizing measures by the Center that have accompanied the implementation of GST. The lack of confidence between the Center and the States has grown. I wouldn’t deny it’s efficient. However, efficiency comes at a price: political, social, and constitutional. I claimed it was not worth that cost.
Will the GST system survive the current crisis?
The country is half pregnant with the GST system, and we can’t go back. Three things form the background of the GST council this week. First, trust is completely collapsing between the States and the Center. Second, the Supreme Court ruling states that Council decisions are not binding on states. Thirdly, the income guarantee expires, which the Center had promised the States for five years. I don’t see GST going smoothly unless the trust issues are resolved, and the revenue guarantee is extended. Everyone recognizes that the GST regime has not met the hype and hopes.
‘One nation, one market’ – how has that idea evolved over the past five years, particularly due to the pandemic?
The pandemic has exposed GST’s shortcomings. Without GST, the states could have managed the situation better by mobilizing and allocating their resources. They eventually argued with the Center, and the Treasury Secretary invoked the divine principle of not making payments to them. Companies appreciate it for its efficiency. However, an economist would not ignore that the impact on the economy did not come close to the extra two percentage points (growth) as expected. The assumption that an easy flow of goods across the country would boost growth turned out to be false, and this was true before the pandemic. Perhaps five years is too early to pass judgment on that; maybe it will happen in the next few years.
Is anything happening in Congress that defended GST while in power? Was this discussed at the Udaipur Chintan Shivir?
I cannot divulge what was discussed in Udaipur, but I can tell you that I am discussing this matter internally at the party as permitted. We shouldn’t be dogmatic about anything just because we once supported it. We must ask for a reassessment and re-evaluation of the GST as it stands now. Yes, the UPA government defended the GST, and the then Gujarat CM, today’s Prime Minister, opposed it. In defense, in the week of the launch of the GST, I wrote a collaborative piece with the current Finance Minister of Tamil Nadu PTR (Palanivel Thiagarajan), who was then an MLA, expressing concern.
Shall we say that the views of the then Prime Minister were less accurate than those of the then CM of Gujarat when the idea of GST was taking shape?
(Laughing) The views of the current Prime Minister are less accurate than those of the recent former Prime Minister. The idea that the GST crisis is an implementation crisis is not true. GST implementation was sloppy, but the fundamental problem is that it is an economic square pin in the federal round hole. It would have been difficult for any government, and this government made it considerably worse with a messy structure. I don’t think that even if the implementation had gone smoothly, there would have been no disputes, and it would have brought in additional economic growth.
Didn’t Indian political parties understand what was going to happen?
Economists and technocrats held sway and viewed it only through the prism of efficiency. They carried the day. They were able to show that it could increase efficiency. They didn’t see what it does to federalism when regional parties know they have no taxing authority.
Do you think the current GST regime can be saved by changing it?
Restoring confidence is the most fundamental challenge and is the sole responsibility of the Centre. To reverse the centralizing direction of governance, the Center should consider giving states powers over direct taxes that they currently only have in agriculture, which is rarely used. It should extend the income guarantee, which will clearly signal its commitment.
