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Wednesday, August 17, 2022

The dangers of arguing for special treatment of states with higher contribution to GST pool

Sushil Kumar Modi writes: It would set a bad precedent and open the floodgates to the undoing of the force that binds India.

Written by Sushil Kumar Modi |
Updated: June 11, 2021 8:25:56 am
At the GST launch at Parliament on June 30, 2017. (Express Photo: Prem Nath Pandey)

Of late, the issue of GST concessions on COVID relief is being sought to be projected as a Centre versus states issue. Instead of thinking rationally on how to extend maximum possible support to the affected people in the shortest possible time, an attempt is being made to gain political mileage on an issue of pressing human and national importance. In this process, the structure and design of GST — essentially a tax on consumption — is being questioned. Already settled debates on “rich” states versus “poor” ones, the decision-making process in the GST Council, and the representation of various states in the Council are sought to be re-opened.

One would do well to recollect that the structure and design of GST and its basic features, as enshrined in the 101st Constitution Amendment Act, were unanimously adopted and endorsed by Parliament — a body that comprises every political party in India and reflects the will of the people of the entire country. The broader and finer points of the law, including every section, sub-section, clause and sub-clause, were thoroughly discussed and debated and recommended by the GST Council after a complete consensus. These were further debated and approved by not only Parliament but also by each of the state legislatures. The kind of consensus seen on every issue of GST has probably not been witnessed on any other issue. There was complete consensus even on the issue of delegated legislation — something unheard of in a federal environment.

This process of consensus building accorded the same seriousness to a view expressed by any of the so-called “smaller” states as was given to an alternative view expressed by any of the bigger states. No state was accorded even the slightest of special privilege. That is why the consensus surrounding GST was unprecedented whether in India or any other federation. One would do well to recall that none of the numerous decisions, barring one on a very trivial issue, taken in the 43 meetings of the Council involved voting — even on that rare occasion none of the states, barring one, wanted voting. This speaks volumes of the degree of maturity exhibited in the deliberations of the Council. Having come so far, one decries any attempt to reopen some of the fundamental issues.

The Pareto principle holds in almost every field, be it tax yield, distribution of income or wealth, inventory levels, quality control, and or even sports. But this, by itself, is no occasion to argue for any special dispensation to a “few” whose contribution is seen to be of a relatively higher order. Arguing for such a special dispensation is a dangerous idea, particularly in governance, and more so in a welfare state. For, this would open the gates for elitist arguments such as special rights for bigger taxpayers, unequal voting rights in elections and preferential treatment for a select few.

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It is worthwhile to examine the argument advanced in this context — “greater contribution to the GST revenue pool”. It is not correct to argue that the GST collected in a state represents the revenue of that particular state for, under the GST mechanism, the tax deposited by a taxpayer in a state is a function of largely the value of supplies made by such taxpayer. Most (approximately 50 per cent at the aggregate level and much higher at the state level) of such values are of an inter-state nature. In other words, most supplies made from any producing state are consumed elsewhere and the revenue in such a situation naturally and rightfully accrues to the destination state.

It is equally fallacious to argue that under GST, most of the revenue is collected by the Union and is transferred to the states on the basis of some formula. The quantum of IGST revenue that is “settled” to any state is directly related to the returns filed in that state and the cross utilisation of credit exhibited in such returns; part of this settlement also comprises tax on supplies “destined” to that state, as exhibited in the returns of such suppliers. There is no “formula” as such for “transfer” of revenue collected by the Centre. Instead, such “transfers” are directly relatable to the consumption (whether intermediate or final) in any state.

There is another dimension to the higher revenue collection in a few states. One may note that such states enjoy locational or geographical advantages, being mostly coastal and immensely suited to the needs of trade and distribution as also manufacturing. In this context, one may recall that the disadvantage to such states on account of lower availability of certain vital minerals like coal and iron ore was undone by the principle of freight equalisation resorted to in the years following Independence. This contributed, in no small measure, to the development of such states.


The argument of unequal transfers of central receipts also does not hold water, either in India or in any other federation; it is like saying that those members of a family who earn relatively less should be given less to eat. As is well known, such transfers are intended for correcting horizontal fiscal imbalances in a federation.

The principle of “one state one vote” is sacrosanct and inviolate and is also the norm in every civilised discourse. Even in the UN, every country has one vote. The taxation federation in Europe also works on this principle. If this principle is called into question, even for the sake of discussion, it would open the floodgates to the undoing of the force that binds this great country.

We should thus concentrate on carrying forward the glorious traditions of perhaps the only institution of co-operative federalism that we have been able to build so far.


This column first appeared in the print edition on June 11, 2021 under the title ‘Hierarchy GST doesn’t need’. The writer, a former Deputy Chief Minister of Bihar, is a BJP Rajya Sabha MP.

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First published on: 11-06-2021 at 03:05:53 am
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