Tuesday, May 18, 2021
Home Opinions Two years of GST: The GST Council Miracle and how Modi sarkar became the...

Two years of GST: The GST Council Miracle and how Modi sarkar became the first to survive GST

The GST isn’t perfect yet, but it’s getting there.

It’s July 1, 2019. Exactly two years since India’s tax system was completely overhauled and replaced with the Goods and Services Tax (GST) on July 1, 2017.

The 2019 election set many historic ‘firsts’ at the domestic level: after all, this is the first time in decades that a full majority government served out a full term and got re-elected with another full majority. When did that happen the last time? Under Nehru in 1962!

But one of the most stunning (and relatively unnoticed) feats was a global ‘first.’

Untitled.png
A government that introduced GST voted back to power with thumping majority

Indian Prime Ministers had been toying with the idea of GST for a very long time. But there was a reason they kept backing away. Because GST is the electoral equivalent of ‘bad luck charm.’ No government anywhere gets reelected after implementing GST.

The reasons are not difficult to understand. Overhauling the entire tax system creates tremendous short term pain. And whichever government is in power faces the brunt of public anger. Obviously, GST is a long term investment in the economic future by getting rid of a thicket of central, state and local taxes. But elections always happen in the short term.

Add to it the diverse, chaotic and hyper-competitive Indian political scene and you begin to see the enormity of the GST challenge. Not only does GST threaten revenue collection of the Central Govt, but it also puts the autonomy of state governments on the line. These problems assume bitter regional dimensions when you look at richer Southern and Western states versus the poorer states in the North and East.

It takes a brave man to put his mandate on the line over the GST bet, knowing that nobody else has won that bet before.

The GST challenge can be broken down into three parts

(1) The first was simply generating the political consensus around GST

A Constitutional Amendment would be required. Two-thirds majority in both houses of Parliament and ratification by at least half the states. How difficult is that when you have an opposition determined to block ‘everything’ and calculates that it has nothing to lose?

The miracle here was the creation of the unique body called the GST Council. How the council works is a marvel that is rarely ever explained.

The Council consists of representatives of the Center as well as the states. But here is how the voting powers break down:

Center : 1/3rd of the vote

States: 2/3rd of the vote

The first question here is which state gets how much vote? Well, every state gets the exact same number of votes! No matter how big, how small, how rich or how poor.

Imagine the political skill that went into creating a consensus like this across state governments. Imagine the hornet’s nest of political egos, regional chauvinism and old rivalries that had to be overcome for this.

Observe also the strategic climbdown for the Center to just 1/3rd of the votes, making the states feel that the Center was not looking down on them. You realize how little power the Center kept for itself when you learn that the GST Council can only take a decision if 75% of the votes are in favour.

So the Center (with 33% vote) effectively has veto power in the GST Council which needs at least 75% to agree on any decision. But not much more. In order to reach the magic figure of 75%, the Center must take 18 of the 29 states along or it won’t get its way.

On a side note, perhaps you can now see why it was so important for Modi to have NEDA governments in North Eastern states, no matter how tiny. The GST Council is where the real action is.

Over the last two years, this miracle called the GST Council has been managed so smoothly that its inner workings have rarely made news. Building this council was a balancing act with no parallel in recent history.

(2) The second challenge was to manage the short term economic pain after GST

Here are two charts, showing what happened to GDP growth when Australia and Canada tried to implement GST.

Untitled.png
GST implemented by Canada on 1st January 1991

Untitled.png
GST implemented by Australia on 1st July 2000

See the plunge that GST caused! Now let us put in context the challenges in India versus a first world country like Australia or Canada. More people live in Delhi than in any of these countries!

The first thing India did was to adjust to the realities of our economy. Instead of a true GST with a single rate, India went for 5 brackets: 5%, 12%, 18%, 28% and 35%. Lots of basic food items, etc were put in the 0% bracket and you could call it the sixth slab of GST if you want.

It’s less than ideal, but surely a mega improvement on the previous system of every item having at least 3 taxes on it: Central, State and Local. If you are lucky. In addition to VAT, service taxes, etc, etc, etc. The old system had literally hundreds of different tax rates on various items. Now, anybody could remember the sequence 5%, 12%, 18%, 28% and 35%.

When GST was implemented, the fears were many. Government revenue could have dropped precipitously. The onus was on the government to ensure compliance and manage the anger of people trying to adjust to the new system. Without choking the economy completely as had happened in every other country.

But none of the fears came true. India’s economy slowed down, but it still remained the fastest growing in the world. GST compliance burden was reduced from monthly filings to quarterly filings that most businesses would already have been familiar with. Items were constantly moved into lower and lower tax brackets (the 35% bracket is now almost empty), but total tax collection kept growing at a healthy pace.

(3) The third challenge was to handle the political fallout of GST

When GST was launched on July 1, 2017, PM Modi graciously invited all ex-Prime Ministers to be present by his side, reflecting the consensus around the passage of the GST bill and the non-partisan nature of the GST Council.

But in a characteristically cowardly move, Dr Manmohan Singh declined the invitation. The Congress was making it clear that GST would be Modi’s tax. And he would be on the line for all the immediate inconvenience that would follow. And as India’s economy shut down for a month before and after July 1, 2017 to adjust to the new regime, the Congress made the most of the low GDP numbers. Before the crucial Gujarat election.

Who remembers that Sonia ji’s UPA government had said India was ready for GST already in 2010? Nobody. You know it was Chidambaram who had set Apr 1, 2010 as the GST deadline. But, suddenly in the summer of 2017, Congress and its entire ecosystem told us that GST is “premature.”

Modi was on his own to handle the fallout. The fact that people stuck by him is a historic masterclass in leadership. In July 2017, the election was less than 2 years away. He showed confidence in the people. And the people in turn showed confidence in him.

People rarely listen to government assurances when they are hit in the pocketbook. Modi had to ensure those hits were kept to an absolute minimum and make people believe he was doing his absolute best.

The GST isn’t perfect yet, but it’s getting there. As I mentioned before, the top slab of 35% is now almost gone and the 28% slab is gradually getting hollowed out as well. Three things: fuel, real estate and alcohol are still outside GST.

The biggest takeaway here is that India and Modi sarkar survived an economic and political storm like no other. And came out relatively unscathed. Here’s to the Ease of Doing Business!

  Support Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

Abhishek Banerjeehttps://dynastycrooks.wordpress.com/
Abhishek Banerjee is a math lover who may or may not be an Associate Professor at IISc Bangalore. He is the author of Operation Johar - A Love Story, a novel on the pain of left wing terror in Jharkhand, available on Amazon here.  

Related Articles

Trending now

Newslaundry columnist Sharjeel Usmani gives communal angle to crime to defame Hindus and ‘Jai Shri Ram’

The crime in Haryana which Sharjeel Usmani used to defame Hindus is suspected to be a case of personal rivalry.

Haryana: Police rules out communal angle in murder of Mewat youth Asif, two groups are old political rivals. Details

As per police, Asif had beaten up Pradeep's group members 20 days back, and Pradeep decided to avenge the attack.

From Mumbai 26/11 attacks to Yati Narsinghanand Saraswati assassination plot: How Islamic terrorists use Hindu symbols

Delhi Police recently averted a major assassination attempt against Dasna Devi Temple head-priest Yati Narsinghanand Saraswati.

Odisha: Sonu Sood clarifies after Ganjam DM says they had not received any communication from him regarding bed for COVID patient

The Collector and District Magistrate of Ganjam has called out Sonu Sood after the actor claimed to have arranged a bed.

Punjab: CM Capt Amarinder accused of threatening Congress MLA for raising his voice in 2015 sacrilege case

Pargat Singh revealed to media that Punjab CM through Captain Sandhu said that he should be ready to face action.

West Bengal: TMC goons pelt stones at CBI office, attack journalists, try to break into Raj Bhawan

TMC goons reached Raj Bhawan and began agitating outside the premises. Later, some of the hooligans tried to scale the gate.

Recently Popular

Legendary Australian cricketer slams world media for ‘vulture’ journalism, says Incredible India deserves respect: Here is what he said

In a recent post, the former cricketer has expressed his overwhelming support for India and slammed international media for vulture journalism

Pakistan based CNN contributor Adeel Raja says world needs another Hitler amidst Israel-Palestine conflict, has history of anti-Semitic tweets

Adeel Raja, freelance contributor at CNN, has said that the world needs a Hitler today amidst the Israel-Palestine conflict.

Assam: Six arrested for disrespecting national flag, accused caught using tricolour as table cloth for Eid feast

An image of Rejina Parvin Sultana, a resident of Assam's Tengnamari village, feasting lunch with her family on the occasion of Eid had gone viral on the internet.

Odisha: Sonu Sood clarifies after Ganjam DM says they had not received any communication from him regarding bed for COVID patient

The Collector and District Magistrate of Ganjam has called out Sonu Sood after the actor claimed to have arranged a bed.

Vinod Dua’s daughter, who wanted all ‘bhakts’ dead, receives help from a ‘bhakt’ MP while her mother needed critical COVID medicines

BJP supporters lodged their protest about minister chipping in to help the elites in India, when commoners are equally suffering, especially when the elites have not asked for their help.

UAE warns Hamas, asks to keep ‘calm’ or lose funding for infrastructure projects in Gaza

Last year, the United States under the Donald Trump administration has helped to broker a peace deal between UAE and Israel in the form of 'Abraham Accords.'
- Advertisement -

 

Connect with us

255,215FansLike
545,312FollowersFollow
24,300SubscribersSubscribe