The President has given his assent to the Constitution (One Hundred and First Amendment) Act, 2016, enabling the implementation of a nationwide goods and services tax (GST). The next steps for implementation of the GST need to be taken by the GST council, which will be constituted after the Act becomes effective. Like the small hinges which swing open massive vault doors, the council will be the gateway to the successful implementation of GST, the creation of a national market and sustained accelerated growth.
The council embodies a radical shift in structure, functions and responsibilities when compared to the empowered committee of state finance ministers, which has so far been coordinating GST issues.
The council is a constitutional body, with correspondingly onerous duties, outlined in Article 279A. It needs to operate in a transparent, predictable and consistent manner so that it commands the respect and credibility not only of its members but also of all the stakeholders across the GST spectrum—ranging from manufacturers, traders and service providers to consumers, civil society, academics and the nation at large.
Given that it will be the arbiter of most indirect taxes in India across the Centre and all states, it must aim to become a 21st century world-class institution epitomizing cooperative fiscal federalism at its best.
1. Rules of procedure
The council has crucial responsibilities relating to finalizing the tax base by recommending the goods and services to be exempted, the threshold for taxation, the revenue-neutral rate (RNR) and the rate structure.
These are far-reaching issues which will impact the economic interest of all the states and the Centre and will therefore be subject to intense debate. In the interests of its credibility and predictability, it is essential that the first item of business of the council should be to finalize its rules of procedure. The council’s functioning over the next six months/one year will be critical to the successful roll-out of GST.
2. Policy on compensation and delegated legislation
Incentives drive all human behaviour. State and Central governments are as susceptible as humans to the power of incentives in driving their behaviour in the council. The council needs to ensure that, as far as possible, there is a convergence of incentives among all its members before moving on to the main discussion on GST. This is best addressed by getting the compensation formula right and minimizing delegated legislation.
Parliament has to make a law to provide for compensation for revenue losses to state governments, based on the recommendations of the council. To ensure that its discussions on the structure and implementation of GST are not tainted with the problem of moral hazard, the council should, immediately after finalizing its rules of procedure, finalize its view on the payment of compensation.
All states may prefer payment of 100% compensation for all their losses for the full five years, the period mentioned in the amendment Act. This proposition should be resisted stoutly, as states may then become indifferent to the revenue collection under GST for this entire period.
This issue can be addressed best by providing for a tapered compensation formula: 100% in the first year, 75% in the second year, gradually tapering off to 25% in the last year. This will ensure that states have a strong, continuing and increasing stake in the success of GST. A similar compensation formula was adopted when value-added tax (VAT) was implemented in 2005.
3. Transparency and predictability
To promote investment and growth, changes in taxation policy should be transparent and predictable. There should be no vacuum of uncertainty. Manufacturers, traders, service providers and consumers all over the nation, and consequently, the economy will be affected by the recommendations of the council. Design features and changes to the system should be decided by the council only after following a prescribed procedure and giving due notice to all stakeholders.
Article 269A mandates the council to make recommendations on three issues which may have limited relevance to the GST roll-out.
These are (a) special rates to deal with natural disasters, (b) special provisions for the North-Eastern states, and (c) the date on which petroleum products will be subjected to GST.
To avoid uncertainty, the council may like to indicate when and in what manner it will address these three issues. For example, it could state upfront in which year it will recommend (or at least consider) inclusion of petroleum products in the GST base. To allow the new system adequate time to settle, it could also examine after what period or under what circumstances it will review its initial recommendations on GST rates. Given the preparatory steps required, it may be challenging to bring GST into place by 1 April 2017. The council should also recommend, based on its work plan as well as the need for providing lead time to trade and industry, the earliest possible date for the implementation of the GST in the country. These issues should form the basis of its transparency policy.
4. Inclusiveness
The council singularly is clothed with legislative, executive and judicial powers. It will recommend GST legislation, oversee implementation of the GST in the country and set up a mechanism to adjudicate disputes between its members.
These are sweeping powers, making it akin to a regulator for GST. It should, therefore, exercise its powers with the utmost inclusiveness. There are a number of steps that could be taken to ensure inclusiveness. These could include (a) putting up draft consultation papers in the public domain and inviting comments, (b) regularly inviting trade bodies, professional associations, academics and consumer forums to submit their view on issues being deliberated by it, (c) participating in information, education and communication programmes in association with state and Central governments, and (d) setting up an interactive and continuously updated website in all languages. These issues could form the basis of its inclusiveness policy.
5. GST law and the rate structure
The structure and content of the Central GST, inter-state GST and GST laws, the RNR and the rate structure, which are the subject of intense debate all over the country today, should only have the fifth priority in the council’s order of business. These decidedly important issues should be addressed only after the four issues outlined above have been addressed satisfactorily. This is so for two reasons.
First, without an enabling, conducive, predictable, and transparent environment in the GST council, productive discussion on the intricacies of the GST may be difficult.
Second, while it is relatively simple to determine the RNR for the Central GST, computing the RNR for states individually is difficult at best and impossible at worst.
There are difficulties in estimating the share of service tax of individual states given the lack of state-wise service tax collection data.
In any case, as was seen during the implementation of VAT, finance ministers are notoriously conservative in their estimation of their respective state’s RNR. Expectedly so, given the extreme dependence of state governments on indirect tax revenue. The RNR represents the rate which, when applied over the entire tax base, will generate the current revenue. Such an approach ignores the fact that the state and Central governments, being large consumers of goods and services themselves, will, through the application of lower taxes in the GST regime, reduce their expenditure significantly. To that extent, they may need to generate lower revenue to balance their budgets after GST is implemented.
State governments may, therefore, also like to look at the budget-neutral rate, the rate at which, given lower expenditure, their expenditure budgets remain neutral.
This will be lower than the RNR, and therefore provide a safety cushion for state (and Central) governments.
The Thirteenth Finance Commission had recommended an RNR of 12% over a broad base and with few exemptions.
The Arvind Subramanian panel had suggested an RNR of 15%. The actual rate structure will depend upon the exemptions and the threshold of the tax. Given the need to incentivize growth, it may be desirable to keep the RNR between 12% and 15%. And the GST rates will not be cast in stone. If necessary, they could be revised after a review undertaken by the council.
6. Capacity
The GST council will face significant challenges in addressing the issues identified above. Tax departments in most state governments often have limited staff resources to examine GST-related issues from their government’s standpoint.
The council needs to be aided by an independent and technically strong secretariat, not only to support the council’s requirements, but also to assist state governments in this regard. Given its stature as the body driving GST implementation in the country, the secretariat will need to be both financially as well as technically independent.
To this end, the Thirteenth Finance Commission had given a grant of Rs30 crore to the council’s predecessor—the empowered committee of state finance ministers. The council secretariat must be adequately staffed to enable it to independently propose, analyse and evaluate GST-related proposals so that it can provide objective advice to the GST council.
Conclusion
Over the last 66 years of the Indian republic, the Centre and the states have remained good fiscal neighbours. This is because the Constitution allotted mutually exclusive tax bases to each.
This tax fence between the Centre and the states is now being dismantled by the GST. For the first time, they will share a common indirect tax base, with the GST council providing the modality for doing so.
Whether such a sharing of tax base is both harmonious and sustainable will be the true test of the success of cooperative fiscal federalism in India. The GST council bears the heavy burden of proving that it can be so.
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The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.