One nation, one tax, many puzzles and absent Congress

Political necessities, George Bernard Shaw once said, sometimes turn out to be political mistakes.

Published: 02nd July 2017 04:00 AM  |   Last Updated: 02nd July 2017 11:58 AM   |  A+A-

PM Narendra Modi giving a speech on the launch of GST in Parliament

Political necessities, George Bernard Shaw once said, sometimes turn out to be political mistakes. The Congress party, it can be safely said, frequently finds itself confronted by such necessities and commits blunders. Its boycott of the special session in Parliament, on the introduction of Goods and Services Tax (GST) is one more illustration of the 132-year-old party mistaking tactics for strategy.

India is embarking this month on one of the most complex and courageous taxation reforms in modern times. It is complex because the quest is to replace 17 different taxes and a dozen incidences of cess at Central, state and local levels. It is courageous because harmonisation of taxation across multiple geographies and systems is fraught with systemic risks and disruption.

The introduction of GST is a turning point for the political economy—and is an all-party achievement, in collaboration and cooperation. Consider these facts. The empowered group of ministers was led by individuals from Left, Right and Centrist parties. Ministers from all major parties are on the Governing Council of GST. The amendment to the Constitution that laid the path for the introduction of the unified GST was passed unanimously and applauded by all.

The need for harmonising multiple levels of taxation was known since the 1970s. Baby steps were taken first in the 1980s and in the 1990s. The idea of a common market and common tax was first articulated by the Task Force on Fiscal Responsibility and Budget Management (FRBM) chaired by Vijay Kelkar in 2004—the task force itself was appointed by the NDA regime and the report was received by the UPA regime.

The first steps for a GST were initiated by the Congress-led UPA. In the 2006 Budget, P Chidambaram had said, “I propose that we set April 2010 as the date for introducing GST.” In January 2007, Manmohan Singh as Prime Minister declared, “We will now move towards a common GST”. Pranab Mukherjee said in 2011, the introduction of GST will “mark a watershed moment”.

The decision of the Congress to abstain is, in a sense, unsurprising given the history of self goals. The consensus opinion, about the 1991 reforms is that it was ushered in by P V Narasimha Rao. It was a Congress regime. Yet the Congress Party shunned Rao and shied away from liberalisation for decades. Indeed, in 1998 the Congress appointed a committee under A K Antony to, believe it or not, examine if “reforms were anti-poor”. The report is to be seen or see the light of day.

The idea to abstain it would seem has emanated from the Trinamool Congress (TMC)—a party the Congress fought against in alliance with the CPM in West Bengal, a political geography where anti-reforms stance is a badge of honour. The West Bengal government raised implementation issues. Chief Minister Mamata Banerjee said the “unnecessary disastrous hurry is another epic blunder of the Centre.” What is the cause or explanation of the Congress? That the midnight event violates the sanctity of August 15, 1947, and that the “economy is not ready for GST”. The larger political question is whether abstention will help those that the parties claim to represent and want to help.

There is room for intervention—there are a plethora of puzzles, and a queue of queries. To start with, one nation, one tax, is in reality, one tax, many rates and many forms. While the slogan is alluring, the reality is about one tax and many rates—0, 0.25, 3, 5, 12, 18, 28 and then there is sin goods category with much higher rates. There are some truly curious rates—for instance, why must tooth powder be taxed at 12 per cent and toothpaste at 28 per cent, frozen vegetables at 5 per cent and preserved vegetables at 18, infant food be taxed at 18 per cent and pizza dough/bread at 5 per cent? And rates for yachts, refrigerators, water heaters and air conditioners are the same—28 per cent.

Fact is, globally, the standard for a unified tax is two or three slabs. This was defeated by the politics of economics and the arithmetic of politics. The design says states surrender their right to tax to a unified system. They could seek a guaranteed compensation or dictate the contours of the GST. The states have managed to keep the cake and eat it too. The states had a say in the rates, got a guarantee for compensation and dictated that nearly half the revenue story—alcohol, petroleum, real estate/construction and electricity—has been kept out of GST.

At the operational level, inexplicable complexities have been embedded. There is confusion, for instance, about filing of returns—one each for CGST (Central GST), IGST (Integrated GST) and SGST (State GST) every month and one annual return. That makes it 36+1 forms every year for every state the enterprise operates in. And it seems driven by vested interests in the tax administration. Why must there be three forms—why can’t one form be accessed by all on an interoperable system? There is also lack of clarity on anti-profiteering measures. The promise of faster freight movement is flailing —some states, it seems, will persist with border check posts.

The big concern is about the impact of GST on the informal sector—it accounts for nearly 40 per cent  of GDP and employs the bulk of the workforce outside agriculture. Are they equipped for the transition? Or will their businesses belly up for the big sharks to gobble? It is critical they be guided through the transition—both in retooling their business models and training for compliance. Now these are issues that the parties should have taken up in the run up to the implementation. Relevance in politics depends on bottom up activism. Sadly, that is not to be.

The Congress party surely does not lack in experience and knowledge, on what is a defining moment. Between them, Manmohan Singh and P Chidambaram have presented five and more budgets each. Manmohan Singh, as finance minister, oversaw the post-bailout reforms of 1991, and under Chidambaram India ushered the first big bang reforms in taxes in 1997. Yet, despite their presence, the party has chosen absence as its political statement. To paraphrase Shaw, success is not about never making mistakes. It is about not making the same mistakes… again and again.

Shankkar Aiyar

Author of Accidental

India: A History of the Nation’s Passage through Crisis and Change

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