Modi Cannot Bring the GST into Being without a Grand Bargain with Congress


A national unified Goods and Services Tax (GST) is one of the top priorities of Indian prime minister Narendra Modi’s government. But the complex legal status of India’s version of the GST — which requires both a constitutional amendment and extensive center-state cooperation — means that Modi cannot hope to put the tax in place without the support of the opposition, most importantly the Indian National Congress party. Congress leaders are adamant that they will continue to oppose the GST unless their demands are met, and the ground realities, as well as the political arithmetic, give them a strong bargaining position.

Modi might be able to push the GST through the Rajya Sabha. But if he doesn’t come to an agreement with Congress, his proposed simplified tax system might actually end up making it more difficult to do business in India.

In February, Finance Minister Arun Jaitley announced that the GST would come into effect on April 1, 2016. In May, the lower house of India’s parliament (the Lok Sabha) passed a constitutional amendment that is the first step to bringing the GST into being. It was a major milestone in the long history of the tax. But faced with virulent opposition in the upper house (Rajya Sabha), the government has been unable to bring the amendment to a vote.

Lost in the noise of the disastrous monsoon parliamentary session was the question of what would happen if the Rajya Sabha actually voted on the GST. The proposed tax will alter the constitutional balance of powers between the central and state governments and therefore necessitates amending the constitution. This first step—the Constitution (122nd Amendment) Bill, 2014—is the subject of recent debate in parliament and a necessary prerequisite to any GST worth its name. Amending the constitution requires that each house of parliament approve the amendment by a two-thirds majority of those present. The government easily surpassed this requirement in the Lok Sabha.

In the Rajya Sabha, however, Modi faces an uphill challenge. The two-thirds majority requirement means that even in the unlikely case that the entire membership of the upper house shows up for a vote it will take only 82 votes to stop the amendment. It will not be difficult for Congress to meet this bar.

When the next session begins Congress will have 67 seats in the Rajya Sabha. Party leaders can also rely on the ten total votes of India’s two communist parties, bringing the ‘No’ total up to 77. Both parties oppose a GST under any circumstances. This leaves Congress leaders short only five votes.

According to Wadhwani Chair calculations, there are at least 50 votes still in play in the Rajya Sabha. This includes several of the 17 nominated and independent members and the eight members whose parties hold no more than one or two seats. It also includes major regional parties, such as the All-India Anna Dravida Munnetra Kazhagam (AIADMK), which will control 12 votes. AIADMK leader and Tamil Nadu Chief Minister Jayalalithaa is concerned that the GST could cause her state a “huge permanent revenue loss,” and despite Modi’s efforts to woo her she has asserted that she will support the bill only under certain rather improbable conditions.

Congress can also hope to pick up the 12 votes controlled by the Janata Dal (United) party, (JDU). The JDU, led by Bihar Chief Minister Nitish Kumar, previously supported the GST, but it is locked in a bitter election battle with Modi’s BJP. In August, Kumar declared the GST “not favorable” for Bihar. Similarly, the Bahujan Samaj Party, with 10 seats, was once considered a supporter of the bill, but in late August party leader Mayawati gave a speech in which she called the GST “dangerous.”

If Modi manages to get the GST amendment through parliament, it will need to be ratified by 15 of India’s 29 states. This likely will not be an issue: 16 states are already on board. Yet Modi’s troubles will be far from over. Once the amendment is in place every one of India’s states will need to pass the state-level tax legislation that will create a GST in their state. This includes the ten states where Congress and its allies are in power.

This issue is too-often ignored in commentary on the GST. The constitutional amendment specifies certain details of the bill, but it does not set a rate of taxation and it is written in such a way that states are free to introduce their own legislation and call it a GST. A GST Council consisting of state ministers and two representatives of the central government, will be able to recommend legislation but will have no power to force dissenting states to adopt it. State governments will have a great deal of flexibility. Among other issues, GST legislation will specify when and if the state can raise its own GST rates to collect extra revenue.

If the GST is to reduce the transaction costs of inter-state commerce, all of India’s states will have to agree on a uniform tax rate and then pass basically identical legislation. Differences between states will lead to the exact same bureaucratic red tape that the GST was designed to eliminate, as retailers will be forced to show at what rate tax was paid for every component of their goods, while states will seek to ensure that goods sold or manufactured within their borders have been taxed according to state law.

Ms. Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.


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