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Divergent Reactions Of Kerala And Tamil Nadu To GST Shows Us What's Wrong With The New Tax

Why should Kerala have all the fun?

04/08/2016 3:24 PM IST | Updated 04/08/2016 3:25 PM IST
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An Indian consumer goods trader shows letters GST representing 'Goods and Services Tax' (GST) at his shop in Hyderabad on August 3, 2016.

The BJP and the union government are happy that the roadblocks to the GST Bill have now been removed and that the country will soon become a single market with a single tax; but the inherent contradiction in the economic homogenisation of India cannot be shrugged off with two neighbouring states - Tamil Nadu and Kerala - expressing diametrically opposite viewpoints.

What's more, while the CPM is still sticking to its dissenting note mainly on the point of the Bill's threat to India's federalism, its government in Kerala is quite eager.

Is a Bill with such a defective political gene good for the country, or rather inter-state relations? Tamil Nadu's grouse will be permanent because it believes that the Bill will cost them a perpetual annual loss of more than Rs 9000 crore, while Kerala is privately rejoicing because it will get more money. A genuine case of a hardworking Tamil Nadu feeling discriminated against because it produces wealth, while its lazy neighbour Kerala gets rewarded because it consumes what others produce.

Although the GST has different implications for different states based on the size and reliance on tax-revenues, all except Tamil Nadu have fallen in line because a number of them are BJP-ruled and the others have nothing to lose. But Tamil Nadu's problem is that its production is about 50 per cent more than its consumption and hence as the source of taxation moves from origin to destination, it has to painfully part with its long-held tax-sovereignty and a lot of money.

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Finance Minister Arun Jaitley coming out after GST bill passed in both the Houses during the Monsoon Session at Parliament House on August 3, 2016 in New Delhi, India.

It's not easy. The freedom to tax on the wealth it generates was a constitutional guarantee that the state had justly enjoyed all these years. As Jayalalithaa had noted, "It is quite clear that a manufacturing state like Tamil Nadu will permanently lose substantial revenue if GST is implemented, due to the shift of the levy from the point of origin to the point of destination and also due to the phasing out of central sales tax and the transfer of input tax credit on inter-state sales and inter-state stock transfers to the destination states. Due to the difficulty in fixing even nominally high revenue-neutral rates, it is expected that the extent of revenue loss under GST would be around Rs 9,270 crore for Tamil Nadu." The state is still smarting from the thought of this loss.

Is a Bill with such a defective political gene good for the country, or rather inter-state relations? Tamil Nadu's grouse will be permanent because it believes that the Bill will cost them a perpetual annual loss of more than Rs 9000 crore, while Kerala is privately rejoicing because it will get more money.

The AIADMK raised the same issues in Rajya Sabha on Wednesday as well. In its flagging of the gross loss and the demand for excluding products such as petroleum and tobacco, what it's desperately trying to communicate is also the fear of waning autonomy. Its fear of the loss of autonomy when the country steamrolls uniform systems on an un-uniform country is no less important than its fear of the loss of money.

However, right next-door, Kerala is gleeful because as a state that consumes a whopping (given its size and population) 15 per cent of what the country produces, it's going to gain big. Unlike Tamil Nadu, nobody in Kerala has quoted a ballpark figure, but it's expected to be substantial when taxes are going to be levied at the point of destination. Its joy is as justified as Tamil Nadu's separation-pain because consumption is its strength.

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Incoming Chief Minister of Kerala Pinarayi Vijayan (C) stands alongside Governor of Kerala P. Sathasivam(R) as he takes part in a swearing-in ceremony in Thiruvananthapuram on May 25, 2016.

For instance, earlier this year, the CAG had asked the state to bring e-commerce giants, who had been evading VAT in the state because their point of sales was elsewhere, into its net. Reportedly, the state accounts for about 1.48 per cent of online sales and loses about 174.33 crores in unpaid taxes.

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The state had faced a setback when its attempts to recover penalties from online retailers for not paying taxes was quashed by the Kerala High Court. It may not need to go on appeal; the GST will now set it right. Among other issues, Tamil Nadu's concern about the GST council, the constitutional body that will be set up to govern the new regime is still unaddressed.

TN feels that the council would jeopardise the autonomy of the state in fiscal matters and would also impinge on the legislative sovereignty of the state because the decision-making and voting weight give the Centre the upper hand and "an effective veto".

More over, there is no distinction among the states in weight, which Jayalalithaa feels should be based on their respective representation in Rajya Sabha. As the chief minister of the country's second largest economy and the second most industrialised state, where the industrial growth far exceeds the national average, she is justified in being protective about her political and economic autonomy.

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Jayalalithaa Jayaram, leader of All India Anna Dravida Munnetra Kazhagam (AIADMK), takes part in a swearing-in ceremony as chief minister of Tamil Nadu state in Chennai on May 23, 2016.

Now, the other contradiction. The CPM has been steadfast against the GST bill mainly because it would jeopardise India's federalism. The party believes that taxation is an autonomous right of the state and the centre infringing upon it is against the constitution. In an article, KN Balagopal, party's Rajya Sabha MP from Kerala, sums it up unambiguously: The GST will take away the rights of states to decide taxes according to their socio-economic situations. If passed, this may create a Grexit or Brexit like situation in India, too."

Kerala is gleeful because as a state that consumes a whopping (given its size and population) 15 per cent of what the country produces, it's going to gain big.

He quotes the famous words of Dr BR Ambedkar, during a discussion on the issues of taxes in the Constituent Assembly: "Therefore, I think that the proposal to leave the sales tax in the hands of the Provinces, from that point of view, is a very justifiable thing." Event those days, Ambedkar thought that a large number of resources "on which the Provinces depend have been concentrated in the Centre."

Frankly, CPM is the only party that has taken a principled stand on GST, as envisaged by Indian constitution and the principle of federalism. Party general secretary Sitaram Yechury highlighted these points in the Rajya Sabha on Wednesday as well. However, its government in Kerala has no problem with the new regime. Both the Chief Minister and the Finance Minister of the state had given the green signal in June itself. Gossip mills say that there had been some back room negotiations between Jaitely and chief minister Pinarayi Vijayan.

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Parliametary Affairs Minister M Venkiah Naidu coming out after GST bill passed in both houses during the Monsoon Session at Parliament house on August 3, 2016 in New Delhi, India.

Eventually, even Kerala would feel the pinch during the times of disasters and economic crises when it would be left with no room to levy temporary taxes. More over, it can't also apply punitive taxes, as Yechury highlighted in Rajya Sabha, to discourage unhealthy behaviour of people.

Taxation is not just about money, but it's also a marker of political autonomy in decentralised governance. There should be coordination among the various tiers, but the local government's right to raise resources through taxes cannot be invalidated through old-style centralism. Most of the states that have instantly complied with the GST have nothing to lose because neither their production nor consumption is significant and they would be better off waiting for its GST-share.

According to our constitution, India is a "Union of States" and not the other way round. Its political economy isn't and cannot be uniform and hence applying one set of standards across the board while ignoring a number of others, however critical, is duplicitous.

There should be coordination among the various tiers, but the local government's right to raise resources through taxes cannot be invalidated through old-style centralism.

As Balagopal says, "The Centre is in no hurry to decide better uniform minimum wages for the workers in this country despite a long-standing demand by the trade unions. But to please its corporate masters, both the BJP and the Congress want this Bill to be passed. This Bill will set a dangerous trend against the federalism in this country."

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