Gist of EPW March Week 1, 2019

The Economic and Political Weekly (EPW) is an important source of study material for IAS, especially for the current affairs segment. In this section, we give you the gist of the EPW magazine every week. The important topics covered in the weekly are analysed and explained in a simple language, all from a UPSC perspective.

Topic covered in this article are:
1. Limits of Triumphalism
2. The Structurally Flawed GST
3. Who Is the Encroacher of Tribal Lands
4. Challenges to Indian Fiscal Federalism

1. Limits of Triumphalism

Diplomacy Is the Way Forward

Context

• The Indian Govt had initiated military action as retaliation to the terrorist attack at Pulwama by engaging the Indian Air Force (IAF)
  • Indian fighter jets crossed the Rubicon to launch pre-emptive bombing raids against terrorist camps run by Jaish-e-Mohammed in Balakot.
• The article here discusses about how the Govt needs to engage with the civil society after an attack

Immediate  Response

• First, many, including the national leaders from the opposition, congratulated the Indian armed forces for their action. On the ruling front, as expected, Operation Balakot, as it has been officially named, has immediately generated a sense of triumphalism among the members of the government and its supporters.
• Second, action by the IAF in Pakistan has also been seen by many as a resolute indication of a unity of minds, of both the government mind and the public mind sharing the same desire to teach the attacker a lesson in order to avenge humiliation.

Civil society wearing the robes of think tank

With the dastardly act of violence perpetuated by the terrorists, the general Public immediately took the role of Think tanks suggesting the Govt what steps it needs to take. There was outburst of emotions suggesting war, aggression, courage, and fearlessness. It is here that two questions rise

• What is the guarantee that the public mind with a combative quality would work only outwardly, against external threats, and not inwardly, against its fellow members of civil society?
• Second, is it not the democratic function of the government in power in the embattled countries to demobilize its citizens who are in a combative mood?

This makes it necessary to determine the combative quality of the public mind and what its consequences are for the prospect of peace and harmony, both in society and between nations.

Analysis

• Militarisation is a process through which civil society produces either the conditions for violence, or its actual articulation.
• The objective of civil society is to perpetuate non-violence and the democratic norms of tolerance and being reasonable to each other.
• The members of civil society are expected to keep in mind that defence forces have their own reasoning for dealing with external threat in terms of strategy, planning, and diplomacy.
• Civilians are not expected to take on this role of the defence forces. However, members of civil society seem to have crossed their limits in that they are suggesting to the defence forces reasons as to why war is the only option.
• They have not stopped at this and have gone on to find reasons for turning their “nationalist” anger towards their fellow members of society.

What should the Govt do?

• Combative nationalism leads to a vicious reproduction of “national humiliation,” which, for its resolution, leads to an acute urge for revenge and retaliation.
• The urge to take revenge, thus, remains alive all the time and on both sides of the border.
• The governing class in both India and Pakistan needs to take the responsibility to temper the combative mind, wherever it is present and whenever it raises its head.
• In a peace-loving democratic country, there are limits to triumphalism. And, the government in such a country is expected to see to it that the citizens do not imbibe or cultivate this sense of triumphalism.
• The history of war has shown us that militarisation tends to overwhelm humanistic values.

Way Forward

Indulgence in war, however, without fully exhausting the diplomatic option, is fundamentally flawed. Taking risks without thorough calculations is not a wise course to pursue. Machoism is not the only means available to change the “rules of the game” with Pakistan. The current impasse cannot be resolved by more military action.  Constant conditions of tension and conflict only lead to discontent and are not conducive to peaceful existence.

• Our strategic consciousness must explore hitherto unexplored geoeconomic connectivity options to break the logjam in India–Pakistan relations.
• It cannot be over emphasized that diplomacy must be the means of negotiating peace and safeguarding interests.
• Both countries must now increase their diplomatic efforts to restore normalcy.
• The diplomatic process in India and Pakistan would offer both the countries an opportunity to attend to their respective internal questions and adopt self-reflective attitudes to answer those questions

2. The Structurally Flawed GST

Context

The goods and services tax (GST) has been in operation in India since 1 July 2017. More than a year later it is still a work in progress.

Analysis of the Issues

• By 1 May 2018, more than 400 notifications and orders had been issued leading to confusion not only among the public but also the experts

Potential Benefits of GST as per the proponents

1. Increase in the growth rate of the economy
2. Decrease in the rate of inflation
3. Increased tax collection leading to rise in the social sector spending
4. The mitigation of the black economy with potentially more tax collection
5. Improvement in market efficiency leading to the “ease of doing business” and higher level of exports
6. Fiscal gains to the poorer states since the GST is a last point tax.

Contradictory views

• If the collection of an indirect tax rises, then prices will rise rather than fall. It was shown that even if the government goes in for a single revenue neutral rate (RNR) of tax, inflation will rise since the basics and intermediates will have to bear a higher rate of tax.
• It was also shown that if prices rise and the government collects more revenue which is used to keep the budget deficit down, then demand will suffer and growth rate will fall rather than rise.
• Further, given the complexity of the tax, its impact of the black economy is arguably marginal. Reports of businessmen evading taxes are coming in daily. Even the income tax data shows that a large number of those in the tax net show either nil income or very low income
• Theoretically, it is known that all taxes are “distorting.” Each time a tax is levied it creates distortions.
• The proponents of the GST suggest that since a single tax, that is, the GST, replaces 17 different taxes, it would be less distorting than the earlier system. However, most supplies currently under the GST had to bear utmost three or four taxes, and not 17 as claimed.
• Moreover, now with the GST in place there are still three main taxes, namely the central goods and services tax (CGST), the state (union territory) goods and services tax (SGST/UTGST) and the integrated goods and services tax (IGST). There is also a cess on certain items.
• However, many more stages of production and distribution are taxed now. Thus, the number of times a tax is levied in the system now is more than that earlier. Thus, distortions will not decline and efficiency will not rise.
• The claim that the GST leads to greater equity is also debatable. When goods go across the state borders, the tax goes with them. Thus, all the tax accrues to that state government where the final sale takes place. That is why, the GST is called a last point tax.
• With the poorer or less developed states having proportionately less production and more consumption than the better-off states, the former are called the consuming states while the latter are the producing states. The argument goes that the tax collection will be proportionately higher in the consuming states.
• The producing states like Tamil Nadu and Gujarat were worried that they would lose revenue. They agreed to implement the GST only after they were assured by the central government that it would compensate them for five years for any loss of revenue.
• The tax benefit to the poorer/consuming states will get nullified by the fact that these have proportionately more of the unorganised sector which is getting hit badly by the GST. Thus, the loss of incomes and employment would be much more in the consuming states than in the producing states.
• The GST, therefore, undermines fiscal federalism by truncating the autonomy of the states with a “one-size-fits-all” policy. An additional problem in this context is faced by the third tier of the government, that is, the local bodies, which are ignored in this reform of the indirect taxes. Their revenue sources are being curtailed without assigning new ones. This will have deleterious effects for decentralisation.

Not a Simple Tax

• The GST, unlike the erstwhile indirect taxes, is not levied on the “act” of production, sale and so on, but on any “supply” of goods and services.
• Primarily, the confusion around the GST is because of the lack of a holistic view on the part of the policymakers. A very difficult tax is being implemented in a very complex nation where one-size-fits-all is inappropriate.
• The states worried about possible revenue losses have ensured that items such as alcohol for human consumption and petroleum products, that have high revenue earning capacity, are kept out of the purview of GST. Real estate (not all of real estate) and electricity are also kept out of the purview of the GST.
• This is indicative of the lack of faith within the government itself, on the official claim that GST will lead to greater collection of taxes.

High Costs of Implementation

• GST requires keeping track of all the inputs and the tax paid on them and then of all the outputs and tax to be paid on them and that is a herculean task for businesses. For the government it is an even bigger task since it has to aggregate the data from all the activities of all the businesses to ascertain the tax to be collected.
• The collection and processing of such massive volume of data can only be handled by computerisation. Thus, setting up of a large computer network became essential and a GST Network (GSTN) was created.
• To keep track of all the transactions of businesses, a unique identification number GSTIN has been allotted to all those who have registered.
• Further, to keep track of the movements of goods so that tax evasion can be mitigated, an e-way bill is required. Each trucker has to register and obtain a 15-digit number called TRANSIN. Each consignment transported has to carry an e-way bill and the TRANSIN number, among other things.
• Processing this vast amount of data often leads to the systems crashing or slowing down inordinately thus delaying the filing of data by the producers.

Unorganised Sector’s Plight

• It is a common knowledge that the poor and small producers in this country are a part of the unorganised sector, and they cannot cope with the burden of additional taxation.
• The GST being calculated as a VAT, is supposed to be levied on the value addition at each stage of production and distribution. Whatever tax is levied at the earlier stage (on the inputs) is subtracted from the tax due on the current stage of production (output). This lowers the input costs and cheapens the output.
• The small and the micro sectors are out of the GST network (those having revenue’s lower than the threshold), they are not eligible for the ITC (input tax credit) and their input cost becomes higher than that of the large- and medium-scale producers.
• Further, they cannot provide ITC to those purchasing from them. Thus, their selling price would also be higher than that of those who pay GST.
• If now, they register themselves under the GST network, then their accounting costs rise.
• Anyone who is registered under the GST and buys from them will have to pay the taxes that these small units should have otherwise paid. This is called the reverse charge mechanism (RCM) (suspended till September)
• In brief, for the small and the micro sectors, the GST poses severe problems whether they come under GST or stay out of it

The Way Forward

The clue to this lies not only in the design of the GST itself but also in the problems that were encountered in the earlier tax system. Some of the important ones to mention are:

1. The cascading effect of taxes leading to higher effective tax rates
2. Distortions and loss of efficiency due to taxation at all the stages of production and distribution
3. complexities in GST due to ITC and RCM
4. Adverse impact on the unorganised sectors and the poorer states, even though GST is a last point tax.

• It is repeatedly emphasised that even if the GST is collected at all the stages of production and distribution, it is a last point tax. That is, it is collected at each stage of supply but passed on to the final point of sale where it is collected from the consumer. If that is the case, why collect it at all the stages and not just at the final stage?
• After all this complex system of accounting, the tax is collected from the final stage. So, why not eliminate the intervening stages of taxation and levy an ad valorem tax only at the final stage.
• But there could be a problem when a product is both a final and an intermediate one depending on its use. For a household, spices and lentils are final products but for a restaurant, they are raw material or input for the final dish that is served to its customer.
• Some cascading effect will continue when some of the supplies taxed as final goods and services are also used to produce some other goods and services. However, such items where there will be an overlap between final and intermediate items will be small in number. So, the cascading effect will be less than that under the present GST.
• Businesses in the unorganised sectors would benefit because they would not have to register themselves or pay a tax. This advantage would help them compete with the producers in the organised sector.
• In the present GST, each registered business person is required to fill in a host of forms. Before some temporary changes were introduced in the GST, it was calculated that a business operating in 31 states of India would have had to file 37 forms per annum per state making it a total of 1,147 forms annually. In the proposed plan the number of forms and paper work will reduce to one-third of the present.
• Distortions of the markets, resulting from the taxation of each stage of supply would decline substantially since only one stage of the entire chain would be taxed rather than of the multiple stages under the present system.

Conclusions

• The above discussion provides the broad details of a proposed alternative and its advantages over the present GST.
• Along with this reform of the indirect tax, there is an urgent necessity to reform direct taxes to increase the revenue receipts.
• Another reform required in the present GST is that provision needs to be made for the local bodies. Their autonomy is getting truncated in the present GST.
• In brief, the present difficulties in the GST are not just implementation issues but structural ones. So, a new and simplified GST on final goods and services is needed to overcome these and to resolve the problems currently plaguing the economy.

3. Who Is the Encroacher of Tribal Lands

Context

• The Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 (Forest Rights Act) were aimed at undoing the historical injustices that tribes have suffered for centuries.
• Their forest rights are now in jeopardy following the Supreme Court’s order directing states to evict tribes and other traditional forest dwellers whose claims for recognition of their rights have been rejected.

Background

• It has come in the wake of petitions filed by Wildlife First, a non-governmental organisation and a few retired forest officials challenging the legality of the Forest Rights Act.
• The petitioners blame the tribes for deforestation and encroachment on forestlands, including protected areas, and thereby posing a threat to wildlife.

Previous such Instances by SC

• This is not the first time that the apex court has ordered such eviction. It did so earlier too on a similar petition resulting in countrywide protests and evictions between 2002 and 2004, and resulted in uprooting of around 3 lakh households.

Concerns

• The colonial state had usurped their rights of control and management. They continued to enjoy their traditional rights, though with some restrictions.
• However, post-independence, under the new forest policy, the concession enjoyed as a de facto right was taken away.
• Further, in view of the policy of maintaining one-third of the country’s land area under forest, the enthusiasm to achieve this objective led to the claiming of the tribes’ lands, with even treeless land being brought under the control of the forest department as forestland. Thousands of kilometres of tribal land was encroached upon by the forest department.
• Later acts such as the Forest (Conservation) Act, 1980 and the Wildlife (Protection) Act, 1972 too encroached on their land. It is clear, therefore, that it is the state that is the encroacher.
• The order is going to affect over 10 lakh families across 16 states, and may cover a much larger number considering other states.

Private gain over community

• Since independence, tribal areas have been exploited for mining of minerals and setting up of industries and other infrastructure development projects, such as power, dams, etc.
• Since liberalisation, there has been an unprecedented entry of companies, including multinationals, for exploitation of resources in tribal areas.
• It is ironical that the tribes are held accountable, but not those who denude the forests for private profits and irreparably harm the environment and animal population in the process.
• It is worth noting that, despite allegations of deforestation against tribes, the forest cover, including dense forest, is the best in tribal areas even today.
• The forest department and its officials, along with urbane and elitist conservationists, have been hostile to the Forest Rights Act from the time of its framing to that of drawing up the rules under it.
• There have been numerous complaints regarding the manner in which it is being implemented.

How is the act implemented?

• The process for recognition of the claims goes through three levels.
  • The gram sabha recommends the claim,
  • which then goes to the sub divisional-level authority, and
  • from there it is sent for verification to the district-level authority consisting exclusively of officials, including those of the forest department.
• It is here that the rejection of the claim takes place. Rejection does not always mean that the applicant’s case lacks merit.
• The rejections are often arbitrary, against the recommendations of the gram Sabha and driven by lobbies that want to hand over the forests to private parties and businesses.
• Section 4(5) of the Forest Rights Act specifies that no one can be evicted without proper procedure, but the authorities are themselves responsible for its violation and arbitrary rejection. Often, the rejections are based on only satellite maps, even though they are supposed to be supported by ground surveys as per the rule.

Govt Role

• The recent order has also foregrounded the attitude and disposition of the government towards the tribes and the issues that affect them.
• Indeed, this order would have been different, perhaps, had there been government lawyers to defend the interests of the tribes.

Conclusion

• The manner in which this decade-old case has been handled by the apex court does not repose much confidence in the judgment.
• Indeed, lawyers and judges seem to be far from aware on issues related to tribes. The provisions provided in the Constitution, treat tribes in a special way.
• It is important that lawyers and judges familiarise themselves with these provisions and laws as well as understand the spirit in which the framers of the Constitution viewed the tribal populations. Indeed, it should form an integral part of curriculum at law universities in the country.

4. Challenges to Indian Fiscal Federalism

Context

The state of cooperative federalism in India is analysed by focusing on the trends in vertical fiscal imbalances between the centre and the states, the impact of Fiscal Responsibility and Budget Management acts on the fiscal space of the states, the implications of the Terms of Reference of the Fifteenth Finance Commission, and the need for empowering local governments in the context of centre–state relations.

Structure of taxation

• The functions of macroeconomic stabilisation and distribution are considered to be in the domain of the federal government.
• Allocation in the absence of externalities should be left to the tiers of government which can do it at least as efficiently as the federal government. This is known as the subsidiarity principle.
• Under this division of powers, taxes with more redistributive impacts would be in the jurisdiction of the federation and the larger expenditure obligations, especially in the social sector, would fall in the fiscal territory of the provinces.
• The natural consequence of this is the vertical fiscal imbalance between the federation and the provinces.

Fiscal Federalism during British India

• In the Indian context, although fiscal imbalance between the federation and the provinces can be stated as a reason for substantial sources of revenue remaining with the centre and major expenditure obligations with the states, one cannot overlook the colonial legacy of centralisation under the British.
• When the imperial government began facing a financial crisis, measures were taken for discontinuing the assignment of expenditure and revenue functions to the provinces.
• It was in this situation that the provinces had to devolve a portion of their surplus to the imperial government to finance the deficits of the imperial government.
• A clear delineation of powers between the centre and the provinces was attempted through the Government of India Act, 1935. This had a substantial centralising tilt with discretionary powers for the governor general and governors, and the retaining of major revenue sources with the imperial government.
  • The Government of India Act, 1935, was only partially implemented during 1937–39, when elected governments assumed office in the provinces.
• Later, when the Constitution was framed under extraordinary circumstances after partition, most of the fiscal provisions of the Government of India Act, 1935, found a place in it without any changes
• This is the basic reason for the strong centralising trends in Indian polity, including in the fiscal division of powers and intergovernmental fiscal transfers.

Fiscal Federalism post-independence

• The states started demanding more fiscal powers and share of all taxes collected by the centre from time to time.
• Under the initial constitutional scheme of things, personal income tax was shareable on the basis of the recommendations of the finance commissions (Article 270), and the central excise duty on the basis of law provided by Parliament.
• Other taxes like corporation tax and customs duty were not shareable.
• But after the 80th Constitutional Amendment, on the basis of the recommendations of the Tenth Finance Commission, all taxes of the centre became part of the divisible pool shareable with the states since 2000–01, fulfilling a long-standing demand of the states.
• With respect to the own tax revenue, states have substantially lost the power to vary tax rates of items de facto since 1 April 2005, when Value Added Tax (VAT) was implemented on intra-state trade of goods, and de juresince 1 July 2017, when goods and services tax (GST) was introduced.
  • On the expenditure side, there has been a rise in the share of conditional and tied grants. This restricts the freedom of the states in its spending priorities that takes into account the local specifications.
• There are also constraints arising from Fiscal Responsibility and Budget Management (FRBM) acts, which lay down uniform targets across states ignoring the differing fiscal needs.
• This is happening in a scenario when cooperative federalism is accepted by the centre as the system most suited to the Indian context. Cooperative federalism is a system in which there is joint decision-making between several jurisdictions of government based on consensus.
• The facts and circumstances, however, indicate that we are quite far from what cooperative federalism envisages.

Trends in Tax Revenue

• A look at the composition of central and states’ own taxes and expenditure reveal that the share of the own tax revenue and expenditure of the states is 38% and 58% respectively.
• This reflects the more than proportionate expenditure obligations of the states and also the lesser revenue raising powers vis-à-vis the centre.
• It is in this context that the distribution of resources from the centre to the states has been recognised in the Constitution by way of formation of finance commissions every 5 years.
• The centre has buoyant sources of revenue like personal income tax, corporation tax, excise duty, customs duty and service tax (excise duty and service tax have been subsumed in the GST since 1 July 2017).
  • As regards the structure of taxes, indirect taxes dominated the central tax revenue till the 2000s.
  • During the 1980s, it comprised 80% of centre’s gross tax revenue. Gradually, the share of direct taxes in centre’s gross tax revenue increased to around 50% during 2016–17.
  • The trend in the central tax–GDP ratio shows a rise in the 1980s followed by a decline during the 1990s. In the subsequent two periods, it showed an increase. During the 1990s, the rates of customs duty and income tax were reduced substantially and that was the most proximate reason for the decline in the tax–GDP ratio.
• The question that needs to be answered is whether the tax–GDP ratio reflects the tax potential. Tax potential is not very easily amenable to accurate measurement.
• In Indian context it can be stated that over a period of three-and-a-half decades, the size of the tax-evaded economy has been around a quarter of the GDP.
• This implies that in absolute size, the tax-evaded economy has been growing phenomenally despite the tax reforms in a technology-enabled environment. The increasing size of the tax-evaded economy has an adverse consequence not only for central finances, but also for the states.

Trends in Transfer of Central Resources

• The transfer of resources to states comprises taxes collected by the Union, statutory grants under Article 275 based on the recommendations of the finance commissions, grants given as central share in centrally sponsored schemes (CSS), other discretionary grants, and until 2015–16, formula-based grants for state plans under the Gadgil formula.
• All grants other than statutory grants recommended by the finance commissions are given by resorting to Article 282 of the Constitution under “Miscellaneous Financial Provisions.”
• The transfer of central resources can be broadly classified into tied and flexible grants.
  • The former is a conditional grant which comes with a scheme and has conditionality. The state has no flexibility in deciding how to spend it. The CSS grants fall under this category.
• On the other hand, tax devolution and post-devolution revenue deficit grants given by the finance commission fall in the flexible category as they have no conditionality attached to them and the states can spend them according to their priorities.
  • The completely flexible part of central grants comprises the revenue deficit grants recommended by the finance commissions to the states, post-tax devolution.

Stats

• When the components of grants are examined, the share of statutory grants, given under Article 275 based on recommendations of the finance commissions, has been on an average 18.53% of the total central grants during the period 1999–2000 to 2016–17
• The CSS comprised around 19.14% and central sector schemes (CSs) formed 2.84% during 1999–2000 to 2016–17.
• The state plan grants, that consist of grants for externally aided and specific projects, constituted 46.91% of the total central grants
• But the Normal Central Assistance (NCA), which was based on the Gadgil formula, as a component of central grants was only 13.25%. This has been declining continuously and has been stopped since 2015–16.
• This implies that only 24.11% (10.86% revenue deficit grants and 13.25% NCA) of the central grants was based on a norm and that the rest, 75.89%, was discretionary. The completely flexible component, that is, the revenue deficit grants was only 10.86%

Trends in Tax Devolution

• Under Article 270 of the Constitution, the net proceeds of all taxes levied by the union, except surcharges and cesses are shareable with the states after the 80th Constitutional Amendment. The finance commissions since the Eleventh have been devolving the shares of all Union taxes to the states.
• Net proceeds are defined in Article 279 of the Constitution as gross tax revenue of the centre less surcharges and cesses, and cost of collection. However, the amount of net proceeds is not published in the budget documents of the union.
  • Surcharges and cesses are levied for the purpose of the union and are not shareable with the states
• When the share of taxes recommended to be devolved by the finance commission rises, the size of the divisible pool itself is made smaller. Besides this overt act, the lack of transparency in computation of net proceeds has also caused losses to the states.
• This not only illustrates the extent of financial losses, but also the erosion of constitutional rights of the states through legislative and administrative actions of the centre.

FRBM Acts and Asymmetric Impacts

• The FRBM acts were passed at the level of the centre and the states in the beginning of the 2000s.
• The large fiscal and revenue deficits of the centre and the states prepared the ground for setting numerical deficit ratios as a percentage of GDP/GSDP (gross state domestic product) and passing legislations stipulating the time period for achieving these targets.
• Examining the adherence to the FRBM acts, the states have been forced to limit their deficits due to sanctions by the finance commissions, whereas the centre is not bound by any such conditionality.
• It can be seen that the revenue deficits have almost been eliminated by the states and fiscal deficits have been below 3% in the post-FRBM period.

Post-GST Scenario

• The implementation of the GST is being demonstrated as an example of the working of cooperative federalism.
• Let us examine from the voting rights in the GST Council as in the provisions of Article 279A of the Constitution. The states have two-thirds and the centre one-third voting rights. But to pass a resolution, three-fourths majority is required.
• This in effect confers a veto power for the centre, even when states jointly propose a change.
  • The states should be able to adopt a change in their tax structure without the centre’s consent.
• Another important aspect is the apportionment of the GST rates. The committee on Revenue Neutral Rates (RNR) of the central government had suggested the apportionment between the states and the centre at 60:40 ratio, as almost 44% of states’ own tax revenue was subsumed under the GST as against 28% for the centre.
  • The centre also took a long time in implementing the anti-profiteering clause of the GST.
  • The GST in India has not been a good example of cooperative federalism, in which equal stakeholders take decisions based on consensus.

Empowering Local Governments

• In a federal set-up with considerable unitary tendencies, democratic decentralisation is essential to preserve the existing federal features as well as to strengthen the democratic content.
  • It is essential to de-bureaucratise the development functions and ensure peoples’ participation.
• According to the report, the Local governments in India are still a shadow of “institutions of self-government” envisaged in the Constitution. On the whole, there is an institutional sclerosis with regard to the decentralisation process.
  • A major impediment for substantial progress in decentralisation to Local governments is the lack of any initiative to restructure centre–state relations in India.
  • In fact, there should be tax devolution and unconditional grants enabling the states to carry out social and economic sector programmes with the empowered participation of the Local governments.
• On the contrary, the delivery of substantial resources through the CSS makes the states and the Local governments as mere agencies rather than equal partners in a federal set-up in which they can formulate and implement policies.
• In short, the empowering of Local governments is not possible at the cost of constitutional powers of the states. A more meaningful decentralisation would require moving away from the asymmetric nature of centre–state relations.

Conclusion

• Assessing the trends in tax devolution, the experience with the FRBM acts in the light of the recommendations of the FRBM review committee, the structure of GST, we are quite far from what cooperative federalism envisages
• As revealed by many studies, the performance of tax revenue in India is below its potential. This limits not only the spending capacity of the centre, but also the amount of taxes devolved to the states.
• Besides, what is constitutionally sought to be devolved to the states is not being done in its spirit by the centre, which imposes surcharges and cesses as a means of raising revenue, without the same being part of the divisible pool of taxes shareable with the states. There also exists non-transparency in the computation of net proceeds.
• The FRBM acts have imposed an asymmetric burden on the state governments in the face of non-compliance to the targets by the central government. This is sought to be accentuated by the recommendations of the FRBM Review Committee, 2017.
• The rate apportionment and voting rights in the GST Council are not in accordance with the principles of cooperative federalism, in which decisions are to be taken by a consensus among equal stakeholders.
• The decentralisation of the Local governments is impeded by the asymmetry in centre–state relations.

For more EPW articles, read “Gist of EPW”.