Seven Decades of Independent India

by Vinod Rai

  The significance of the GST as a landmark tax reform is evident from the fact that it required a Constitutional amendment to enable the Union government to tax consumption of goods and allow states to tax consumption of services. Following the amendment, both the Central and the state tax bases have merged, and both the Centre and state governments will collect taxes from this common base. The Constitutional amendment also enabled the creation of the GST council. The council’s chairperson is the Union finance minister and all states have their ministerial nominees as members of the council. Since the creation of the council in November 2016, it has met on several occasions. On average, it has been meeting on a fortnightly basis for bringing clarity to the design, rate structure and mechanisms for compensation under GST. This is a commendable achievement. This also shows that the Indian federal system has begun to transform itself as a federation where both the Centre and states have learnt to trust each other, to the extent of giving up their exclusive taxation rights with respect to a particular tax base for a better system. This common tax base creation should result in an abolition of the fragmented tax regime, development of a common market, elimination of cascading of taxes and should help increase the growth of GDP by promoting trade, business and investment.

  Taxes under GST

  In line with the simple composite indirect tax system that exists in several other countries, the GST has subsumed a variety of existing Central and state taxes.

  a) The Central taxes absorbed by the GST include central excise duties, additional duties of excise, additional duties of customs, special additional duties of customs, service tax and central cess and surcharges so far as they relate to the supply of goods and services.

  b) Similarly, state taxes subsumed by GST are state VAT, central sales tax, luxury tax, entry tax, entertainment tax, taxes on advertisement, purchase tax, taxes on lotteries, betting and gambling and state surcharges and cess so far as they relate to supply of goods and services.

  As of now, petroleum products, alcohol for human consumption, the real estate sector and electricity are kept out of the purview of GST. In other words, though most indirect taxes have come under GST, a large part of the economy in terms of sectors fetching significant revenues also remain outside its purview. Incomplete coverage of goods and services is an issue that the country needs to resolve as India moves further on the path of reforming indirect taxes for obtaining the full benefit of GST with a comprehensive coverage. There is little doubt though that the currently agreed structure is a vast improvement from the present design.

  Introduction of the GST resulted in the abolition of age-old regressive central sales tax (CST). CST was a regressive tax levied at the point of production. The practice had resulted in a significant tax ‘exportation’—i.e. change in share of taxes paid—from richer producing states to poorer consuming states contributing to fiscal inequality in the country. This precisely is the reason why some of the relatively richer producing states are not happy with the abolition of CST and were initially opposed to the idea of GST. It is expected that revenue gain due to expansion of base as a result of the destination principle of taxation and additional taxation of services should result in significant revenue gain to states after the input tax credit adjustment and loss of CST revenue.

  Transitional Issues in GST

  The government has declared that the remaining period of the financial year 2017–18 after the implementation of GST on 1 July would be treated as a period of transition. This implies that the government would be prepared to make calibrated changes as the situation unfolds, without a rigid view. But despite the fact that the GST council has been trying hard to be as clear as possible in drafting rules and conveying them to all the stakeholders for the successful implementation of the regime, several transition issues need to be addressed.

  Amongst the several issues and implementation challenges being faced by the entire country, the key problem is of ensuring the dissemination of symmetric and timely information to all stakeholders. Given the completely new tax regime the country has now adopted, despite several guidelines/circulars/announcements, lack of clarity on multiple issues faced by very diverse industries/sectors remains a concern.

  Another challenge in the transition phase will be the modification of IT systems to make them GST-compliant. The multiplicity of rates, decentralized registration, generation of item-wise invoices with multiple copies, calculation of item-wise GST for multiple slab rates, and printing of such invoices containing numerous details, have increased the challenge. The experience of a few months after GST shows that such a mammoth technical upgradation of record-keeping and maintaining exercise seem to have created hardship for the traders, especially small businesses. The GST council is trying to address these issues. It has reduced the frequency of filing of tax returns now from monthly to quarterly basis. The council also has slashed rates on more than 175 items, reducing taxes on these from the existing 28 per cent in one of the biggest tax reductions since the new system kicked in.

  A related transition issue is adherence to the anti-profiteering provisions. The anti-profiteering rules aim to ensure that the benefits of reduction in the rate of taxes on the supply of goods and services, or the benefit of input tax credit by way of reduction in prices, must be passed on to the buyers. This will definitely lead to some distortionary pricing in the interim period, the consequences of which can be manifold. But once the system stabilizes, competition and operation of market forces should result in automatic operation of the pass-through mechanism of input tax credit.

  Has GST Compromised Federalism?

  It is certainly true that the right to taxation is intimately linked with the right to decide on the rate of taxation. Post GST, individual state governments would not be able to decide on its rate structure in a particular state. That way, some might argue, for the sake of tax harmony, fiscal autonomy has been ‘compromised’. This is true for the Central government as well. The Centre also cannot change the rates without the approval of the majority of the states in the GST council.

  But if one examines the big picture, in a globalizing world, fiscal policy, especially tax policy, became ineffective a long time ago. To give an example: to attract global investment, India really cannot have a corporate income tax rate that is way above the rates in other emerging market economies trying to attract the same investments. The same is being reflected here, i.e. a process of harmonization of tax rates across the country through a process of negotiation in the GST council. In the former case, it is the market that forces a country to align rates to a particular reference; in the latter, it is happening through a process of negotiations. Even with fixed minimum rates, states would have ultimately converged to a particular reference rate. The larger question is whether rate harmonization alone is sufficient to attract trade and investment? Probably not. There must be harmonization of processes. If business and trade have to face different kinds of complexities in complying with tax laws in different states, rate harmonization would become ineffective.

  Finally, post-GST fiscal architecture is an outcome of the Constitutional amendment. It is too late to reopen this issue. Autonomy of all levels of governments, including that of the Union government, has been tied to the GST council on matters of indirect taxation. It is the responsibility of the council to work in a manner that preserves and strengthens the fiscal autonomy of all the levels of governments. The Centre, clearly, would have to take the lead in this regard.

  Appendix 1*

  Sugarcane Characteristics across Major States

  Source: (CACP, 2015–16).

  † Note: Number of standard irrigation at 7.5 cm depth per hectare.

  Appendix 2*

  Change in Sectoral Shares in India (1970–2016)

  Source: Compiled by author from World Development Indicators Database, World Bank, available at http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators; and Ministry of Statistics and Programme Implementatio
n, Government of India, available at http://www.mospi.nic.in/data.

  Appendix 3*

  Change in Sectoral Shares in China (1970–2016)

  Source: Compiled by author from World Development Indicators Database, World Bank, available at http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators; and National Bureau of Statistics of China, http://www.stats.gov.cn/enGliSH/Statisticaldata/AnnualData/.

  * Chapter VII: Towards Sustainable, Productive and Profitable Agriculture.

  * Chapter XI: Indian Industry: Prospects and Challenges.

  * Chapter XI: Indian Industry: Prospects and Challenges.

  Notes

  Introduction

  1. Vaishnav, Milan, and D.C. Danielle. ‘A devil called policy paralysis’, India Today, 18 May 2014. See http://indiatoday.intoday.in/story/policy-paralysis-upa-ii-corruption/1/362386.html.

  2. Apart from the deceleration in GDP growth (5.7 per cent in Q1 of FY 18 as against 7.9 per cent in Q1 of FY 2017), the Centre for Monitoring of the Indian Economy (CMIE) estimated a loss of 1.5 million jobs during January to April in 2017.

  3. India received wheat supplies under the US PL-480—a food aid programme of the United States administered in the sixties by president(s) John F. Kennedy and Lyndon B. Johnson. See https://history.state.gov/milestones/1961-1968/pl-480.

  4. ‘People practicing open defecation (percentage of population)’, World Bank. See https://data.worldbank.org/indicator/SH.STA.ODFC.ZS.

  Chapter I

  1. Under that modus vivendi, India and China discussed their differences, like the boundary question, but did not allow the absence of a settlement to inhibit other cooperation such as trade, etc.

  2. The proportion of merchandise trade in GDP has since dropped as world trade has shrunk.

  Chapter II

  1. A shorter and slightly abridged version of this essay was also submitted to the Lok Sabha Secretariat for their publication to commemorate seventy years of India’s independence.

  2. Economic Reforms: Discussion Paper. Ministry of Finance, Government of India, July 1993, p.1.

  3. Mexico’s sudden decision in 1994 to devalue the peso vis-a-vis the US dollar triggered abrupt capital flight and deep convulsions in the Mexican economy. The ‘Tequila’ effect is the informal moniker for the knock-on impact of the peso devaluation on other currencies of the region (Southern Cone and Brazil). The Tequila crisis was the first international crisis set off by capital volatility.

  4. Reserve Bank of India, database on Indian economy. See https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home.

  5. All data in this paragraph estimated from: Reserve Bank of India, database on Indian economy. See https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home.

  6. All data in this paragraph estimated from: Reserve Bank of India, database on Indian economy. See https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home.

  7. Reserve Bank of India, database on Indian economy. See https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home.

  8. See: ‘Competitive Monetary Easing—Is It Yesterday Once More?’ Remarks by Raghuram Rajan, former governor of the Reserve Bank of India, at Brookings Institution, Washington, D.C., 10 April 2014. See http://www.bis.org/review/r140414b.htm.

  9. External Sector is the portion of a country’s economy that interacts with the economies of other countries. In the goods market, the external sector involves exports and imports. In the financial market it involves capital flows. Source: Wikipedia.

  10. Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Source: Investopedia.

  Chapter III

  1. Quraishi, S.Y. An Undocumented Wonder: The Great Indian Election. New Delhi: Rainlight, Rupa Publications, 2014.

  2. Sen, A. ‘Democracy as a Universal Value’, Journal Of Democracy, 10(3), 3–17. See http://dx.doi.org/10.1353/jod.1999.0055.

  3. Quraishi, S.Y. An Undocumented Wonder: The Great Indian Election. New Delhi: Rainlight, Rupa Publications, 2014.

  Chapter IV

  1. Gopal, Sarvepalli. Jawaharlal Nehru. New Delhi: Oxford University Press, 1979, vol. 2, p. 162. India: A Reference Annual, 1953. New Delhi: Ministry of Information and Broadcasting, 1953, pp. 4, 315–16. Butler, David, and Ashok Lahiri and Prannoy Roy eds., India Decides: Elections 1952–1989. New Delhi: Living Media India, 1989, p. 56.

  2. Annual Reports 2014-15. New Delhi: Telecom Regulatory Authority of India, 2015, p. 15.

  3. ‘Narendra Modi’s Electoral Milestone: 437 rallies, 3 lakh km’ Times of India, 30 April 2014. ‘Fleet of 3 aircraft ensures Modi is home every night after day’s campaigning’, Times of India, 22 April 2014.

  4. India: A Reference Annual, 1953. p. 317.

  5. Annual Report of the Registrar of Newspapers for India, 1958. New Delhi: Ministry of Information and Broadcasting, 1959, p. 38.

  6. Daily circulation figures are from the annual Press in India, published by the Registrar of Newspapers for India.

  7. India: A Reference Annual, 1953. New Delhi: Ministry of Information and Broadcasting, 1953, p. 316.

  8. Mass Media in India, 1980–81. New Delhi: Publications Division, 1982, p. 201.

  9. MMII, 1980–81, p. 97.

  10. MMII, 1980–81, p. 90. India: A Reference Annual, 1964. New Delhi: Publications Division, 1964, p. 125.

  11. Jeffrey, Robin. ‘The Mahatma Didn’t Like the Movies and Why It Matters: Indian Broadcasting Policy, 1920–1990’, Global Media and Communication. 2006, vol. 2, no. 2, pp. 207–27.

  12. Times of India Directory and Yearbook, 1979. Mumbai: Times of India Press, 1979, p. 203. India: A Reference Annual 1953, pp. 330 and 204.

  13. Jeffrey, Robin. India’s Newspaper Revolution. New Delhi: Oxford University Press, 2010, third edition, p. 64.

  14. Jeffrey. India’s Newspaper Revolution. pp. 41–42.

  15. Statistical Outline of India, 1984. Bombay: Tata Services Ltd, 1984, p. 94.

  16. Mehta, Nalin. India on Television. New Delhi: HarperCollins, 2008, p. 42. India 1990: A Reference Annual. New Delhi: Publications Division, 1990, p. 279.

  17. In 2015, India was estimated to have more than 60,000 cable providers. TRAI Annual Report 2014–15, p. 6.

  18. Mehta. India on Television, for the contortions of governments confronted with irresistible pressures from impossible to control satellite-based TV.

  19. Press in India for relevant years.

  20. Kohli–Khandekar, Vanita. The Indian Media Business. New Delhi: SAGE Publications, 2013, fourth edition, p. 135.

  21. Mehta, India on Television, p. 157.

  22. Desai, Ashok V. India’s Telecommunications Industry. New Delhi: SAGE Publications, 2006. It tells much of this story. See also: Jeffrey and Doron, Great Indian Phone Book, pp. 39–62.

  23. Annual Report, 2014–15. New Delhi: Telecom Regulatory Authority of India, 2015, p. 4.

  24. ‘Indian Telecom Service Performance Indicator Report’, press release no. 27/2017. 7 April 2017, p. 5.

  25. Bamzai, Sandeep. ‘A Network of Reliance’, India Today, 14 January 2012.

  26. See for example, the financial analysis of the Kolkata group—Ananda Bazar: ‘ABP Group: a tale of contrasts’, The Hoot, 10 April 2017.

  27. Kohli–Khandekar, Indian Media Business, pp. 263–98.

  28. Robin Jeffrey and Assa Doron. ‘Mobile-izing: Democracy, Organization and India’s First “Mass Mobile Phone” Elections’, Journal of Asian Studies. February, 2012, vol. 71, no. 1 pp. 63–80.

  29. Jeffrey, India’s Newspaper Revolution, pp. 1–2.

  Chapter V

  1. ‘India in an Asian Renaissance’: speech by minister mentor Lee Kuan Yew at the thirty-seventh Jawaharlal Nehru Memorial Lecture, 21 November 2005.

  2. Quoted in C.A. Bayly and T.N. Harper, Forgotten Armies. London, 2007, p. 324.

  3. Ibid.

  4. See Kripa Sridharan: ‘India–ASEAN R
elations: Evolution, Growth and Prospects’ in Chandran Jeshurun (ed.), China, India, Japan and the Security of Southeast Asia. Singapore, Institute of Southeast Asian Studies, 1993, p. 118.

  5. Sridharan, The ASEAN Region in India’s Foreign Policy, p. 120

  6. Ibid.

  7. Kaul, M.M. ‘ASEAN–India Relations during the Cold War’, in Gordon and Henningham (eds.), India Looks East: An Emerging Power and its Asia-Pacific Neighbours, 2001, p. 54.

  8. Southeast Asia underwent a period of ‘Indianization’, in which the nations of Southeast Asia were culturally suffused with Indian culture and civilization.

  9. Sridharan, The ASEAN Region in India’s Foreign Policy, p. 120

  10. Satu P. Limaye, quoted in Michael Richardson, ‘ASEAN Nations and India Warm Up’, International Herald Tribune, 29–30 January 1994, as cited by Ishtiaq Hossain, ‘Singapore–India Relations in the Post-Cold War Period’, in M.C. Yong and Bhanoji Rao (eds.), Singapore–India Relations: A Primer. Singapore, 1995, p. 42.

  11. See Sandy Gordon, ‘India and Southeast Asia: A Renaissance in Relations?’, in Sandy Gordon and Stephen Henningham (eds.), India Looks East: An Emerging Power and its Asia-Pacific Neighbours. Canberra, 1995, pp. 207–29.

  12. India’s re-engagement with Southeast Asia began in earnest in the 1990s after a lengthy period of ‘benign neglect’ during the Cold War. This strategic shift was first outlined as India’s Look East policy by then Prime Minister Narasimha Rao in his Singapore lecture in 1994. Singapore remains a strong advocate of India’s engagement and integration with ASEAN.