Earlier, the GST Council broadly approved the four-tier rate structure of five per cent, 12 per cent, 18 per cent and 28 per cent, but spared the essential items, including foodgrains, out of the purview of taxation. The Centre has been allowed to impose a cess on luxury items like high-end cars, tobacco, paan masala, aerated drinks and other demerit goods. This cess amounting to Rs 50,000 crore will continue for five years and the proceeds wherefrom will be used to compensate states for any loss of revenue on account of the switchover to the GST regime. The Centre has promised to abolish this cess after five years. Experience shows that once the cess is levied, it continues one pretext are another. However, the Centre must assure states that the proceeds from this cess will form part of the divisible pool if it continues thereafter. Now onwards, GST would be states’ main source of revenue. Direct taxes like income tax, corporation tax, capital gains tax, etc. are already within the Centre’s domain. Therefore, they must have considerable control over its administration. The only hitch now to implement GST is the exercise of power over the tax assessees. According to Jaitley, “One option is to divide assessees horizontally where those with a turnover of less than Rs. 1.5 crore a year will be assessed by the states and those with more than that will be shared by the states and the Centre”. The other option is to divide the assessees vertically into different strata and then divide different strata between the Centre and the states. The latter is cumbersome and would imply depriving states their right to tax businesses as majority of them are below Rs. 1.5 crore a year. This number has swelled in the aftermath of demonetization as consumers have shifted from small businessmen and traders to the organized markets that have swipe-machines for debit/credit cards. Falling demand and currency crunch collection from indirect taxes has shrunk, thereby adversely affecting state finances.

The Union Finance Minister hinted at a political solution. The GST law allows that in the event of a dispute, a two-third majority decision will prevail. This eventuality should not be explored right at the very start as it will not behove well for federal financial relations. In the past also the states have been losers whenever the decision was taken at the political level. For example, first, sales tax (which was a state subject) on some important items was replaced by additional excise duty in 1957. Then, tax on railway fare (whose 100 per cent proceeds went to states) was merged with railway fare. In 1959, the nomenclature of tax on a company’s income was changed to corporation tax and brought out of the divisible pool. All these decisions were taken at the party level. Another tax whose 100 per cent proceeds were meant for states, viz. estate duty was abolished in 1985. Even the present government at the Centre has abolished wealth tax in the budget 2015-16 and replaced it with 12 per cent cess on “super rich”, which is not sharable. Similarly, corporation tax has been scheduled to be brought down from the existing 30 per cent to 25 per cent and the states would suffer to the extent of 42 per cent, their share in tax revenue.

In the post-GST regime, local self-governments would be losers as they would have to forego revenue from local taxes like octroi, entertainment tax, entry tax, etc. That is why an institutional mechanism to safeguard their financial interests must be put in place

(The author is a former Professor of Economics & UGC Emeritus Fellow, Department of Economics, Punjabi University, Patiala)