What is it about?

QUESTION: Which logic – political or economic – made the subnational states approve the tax reforms, notwithstanding the clear prospect of a reduction in their fiscal autonomy after the implementation of the GST? Designing and implementing goods and services tax (GST) reforms in countries with federal constitutional structures is extremely challenging! There are no easy answers or best practices when it comes to implementing GST in federal countries where (1) the power to impose a GST lies outside the legal competence of the federal parliament and (2) SNGs depend largely on indirect taxes and do not have access to other broad-based taxes. The key obstacle to GST reform in these countries is the need to alter the distribution of powers between the centre and individual states by amending the constitution. However, it is generally recognized in the literature on federalism that changing a constitution, especially to reallocate powers among levels of government, is extraordinarily difficult. These difficulties are exacerbated in developing country federations, which – in addition to facing issues posed by intergovernmental political dynamics and federal constitutional structures – are beset by the problems of low per capita income, income inequalities, regional disparities, fiscal imbalances, poor accounting practices and weak tax administration. Given the well-documented challenges associated with the introduction of a GST in developing country federations, where SNGs depend largely on indirect taxes, the successful introduction of a dual GST model in India from 1 July 2017 following an amendment to the constitutional division of powers warrants a detailed examination.

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Why is it important?

This case study of indirect tax reforms in India outlines the unique process through which India resolved the coordination dilemma associated with the introduction of GST. Three important factors which can produce subnational acquiescence, that is – a convinced executive at the national level; a broad consensus on the rationale of reforms, and the executive’s willingness to offer concessions had prevailed throughout the coalition era in Indian politics, yet the reforms lingered. It is remarkable that the SNGs, which were reluctant to part with their tax authority under coalition governments, became amenable to engaging in the reciprocity of concessions under a dominant-party system. Thereafter, the issue was no longer autonomy versus concessions, but rather how magnanimous the concession package needed to be.

Perspectives

Within a federal system, the national government must determine the minimum level of concessions to be offered to the SNGs in return for the abdication of taxes. The national government, as the first mover in this context, sets the concessions at a level considered rational from its perspective as well as acceptable from the perspective of the SNGs. In this way, the coordination game begins. If the non-affiliated states are large enough to collectively block any constitutional amendments designed to limit subnational fiscal powers, the federal concessions will be rejected, which means that the federal bargain will be unsuccessful. This is the likely outcome when a coalition government rules at the centre and different parties govern different states. However, if a single party controls the national legislature and the majority of states, the coordination dilemma is resolved because any challenge mounted by opposition ruled states is likely to fail. In such a scenario, an interactive sequence of offers regarding concessions will begin, which will continue until an agreement is eventually reached whereby the states surrender their tax authority in exchange for the concessions offered by the central government. This situation of reciprocal offers of concessions in an effort to reach a joint agreement between the centre and the states is what we refer to as concessionary federalism.

Prof. Chanchal Kumar Sharma
Central University of Haryana

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This page is a summary of: Concessionary federalism in a dominant party system? Indirect tax reforms and subnational acquiescence in India, Territory Politics Governance, June 2021, Taylor & Francis, DOI: 10.1080/21622671.2021.1931423.
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