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GST will help India move towards becoming a commercial union
April, 21st 2017

The enactment of the Goods and Services Tax (GST) legislation is a watershed moment in our federal polity. The constitutional amendment and the enabling four GST bills enacted by Parliament is the first instance of pooled sovereignty.

Pooled sovereignty implies that for enhancing overall economic and social welfare, Parliament and state legislatures vacate some space in favour of a designated entity. Some MPs in Rajya Sabha proposed amendments which would technically seek to preserve the sovereignty of Parliament in determining the rates of indirect taxes. In practice, it would have implied the buffer of Parliament between the deliberations of the GST council and action by the ‘Union and States’. It was feared that the GST council was abridging the sovereignty of Parliament.

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Since the constitutional amendment bill was a fait accompli, the current debate of sovereignty curtailment was somewhat dated. Fortunately, the wise counsel of senior Congress leaders like Manmohan Singh and P Chidambaram prevailed for enabling wider consensus to be forged. The proposed amendments, even if it was adopted by Rajya Sabha, were of little material import since all these bills were money bills. The concept of pooled sovereignty is consistent with the broad principles of social contract and best international practices.

The evolution of the concept of pooled sovereignty, per se, has been co-terminus with modern political thought. Indeed, the emergence of globalisation, the changing global economic landscape, the interdependence of nations is embedded and emanate from the concept of pooled sovereignty. The spectacular progress made in achieving high rates of economic growth, the impressive outcomes in poverty reduction and improvement in human welfare stem from sovereignty being subsumed for the broader social good.

The welfare gains from enhanced economic integration of several nations forming trade blocs, common markets, and free trade areas all derive their raison d’etre from pooled sovereignty. The classic case being of the European Union wherein, the political and economic assemblage of 28 nations created a single unified common market and currency. Free movement of goods, services, capital and people across borders produce major spill-over and synergistic effects. And all this is possible only because these nations have proactively embraced the ideas of pooled sovereignty and supranationalism.

The European Parliament draws its inspiration from its constitution stating that “Reflecting the will of the citizens and States of Europe to build a common future, this Constitution establishes the European Union, on which the Member States confer competences to attain objectives they have in common”. The concept of pooled sovereignty seeks to ‘confer competencies’ to achieve the common objective of fostering the multiplier gains from the one common entity that India will now become. In the process, some loss of autonomy is inevitable. This is the fundamental principle which forms the basis of multiple international agreements on environment, trade and tariff preferences. Organisations like the UN, WTO, World Bank, and IMF came into existence because nations agreed to collectively advance their common interests.

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This is the first time that we have invoked the principle of pooled sovereignty. India has always been a common political entity, and as it moves towards a commercial union, the idea of pooled sovereignty should be embraced and broadened to other outstanding federal issues like sharing of natural resources. Meanwhile, leveraging ICT to improve tax administration efficiency and enhancing research capabilities of the GST council secretariat must be prioritised. It cannot be anybody’s intention to saddle the GST, which is essentially a tax reform, with other collateral ideological or economic objectives. Nonetheless, the implied impetus to economic growth has consequential spill over benefits in multiple ways.

The GST is a reality. This does not mean that the last words may have been spoken on further fine tuning of multiple issues based on experience. Multiple tax slabs and exemption of fiscally critical goods like alcohol and petroleum are by no means economically optimal. Nevertheless, constrained optimisation should be the mantra for the GST council. Allaying fiscal pressures require revenue neutrality be the supreme objective while setting indirect tax rates for goods and services. GST-induced growth, favourable global economic scenario and fruition of domestic reforms would definitely create sufficient headroom for recalibration of rates in the near future. Notwithstanding transitional hiccups, the time for GST is now, as John F Kennedy once said, “The time to repair the roof is when the sun is shining”.

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