The Good and Services Tax (GST) is widely seen as one of the ‘big bang’ economic reforms, on a par with the land bill and labour law reforms. Unlike the other two, however, public perceptions about it have been mostly positive.
While many states have indeed expressed concerns about the potential loss of revenue in a GST tax regime, there seems to be general agreement that so long as mechanisms are in place to compensate the states for their revenue loss, it’s a win-win reform for everyone. But is it?
The national discourse on the GST so far has been mostly economistic. The business perspective on GST has become the only one, with the socio-political implications of such a major reform finding little space in the debate.
A broader understanding of the GST dynamic requires situating it in a historical context. Domestically, the GST reform comes in the wake of a steady erosion of the states’ fiscal autonomy. Notwithstanding all the rhetoric about co-operative federalism, it raises disturbing questions about the implications of states surrendering their political right – given to them by the constitution – to determine their own tax rates.
Internationally, the push toward GST is a response to rising unemployment and a falling share of share of wages in the national income, as a result of which governments, faced with declining tax revenues, have had to come up with alternative sources of revenue.
An obvious alternative – raising the taxes on capital -- was not on, as it will offend investor sentiment.
The preferred solution was two-fold: one, reduce government expenditure by cutting social spending; two, via mechanisms such as the GST, widen the base for indirect taxation, which has the advantage of being more difficult to evade, easier to administer, and not being income-dependant beyond a point. But indirect taxes tend hit the economically vulnerable harder than wealthier groups.