GST is inherently regressive, the model overly centralised: Tamil Nadu’s FM

Tamil Nadu’s finance minister Palanivel Thiaga Rajan is of the view that the GST model is ‘overly centralised’ and suffers from both design and execution flaws. In an interview with ET’s Dia Rekhi, Thiaga Rajan also expressed concern over whether the model would be sustainable and viable going forward. Edited excerpts:

You have been a vocal critic of the GST system. What are the specific problems?
There are some fundamental problems in how GST has been designed. It was not a good idea to remove the limited powers of taxation that States had and transfer it to a centralised body. The design was neither concrete, nor clear. The consequences are that operationally it is cumbersome… it is overly centralised. It’s very hard to come up with ‘one size fits all’ national solutions in a country of 1.4 billion people. What worries me a lot is the lack of thoughtfulness, the lack of foresight…

What has been your experience with the GST Council?
The first meeting I went to, we spent an hour and 15 minutes trying to figure out whether there was agreement of which decisions or which rate settings, or which issues should be brought to us for approval… It is not even a one nation, one tax, one system. I have bigger concerns, which is whether the model is federal enough or not, whether the ratio of indirect to direct taxation at the Union is fair or not, and whether the state’s rights are being properly granted or not. The answer to all those is ‘no’.

Industry has been seeking GST rate rationalisation…
I don’t know. I agree that four or five rates are complicated to implement, and you start worrying about input rate versus output rate. (But) let’s assume you could wave your magic wand and say, right now every product is at 11.5% and to make it revenue neutral, next year, the GST Council says every product is 14%. Even that I’m not sure, because by design, the GST is inherently a regressive tax — all point of sale, all indirect taxes are inherently regressive. The poor and middle-class pay a much higher percentage of their income or wealth on taxable goods and services, the well-to-do pay much less. When (former PM) Manmohan Singh left office, direct taxation from corporates and high net-worth individuals was about 55%, and only about 45% or 43% was indirect taxes. Much fairer, right? The OECD benchmark for fairness is 60% direct and 40% indirect, because direct is always progressive. Now…it’s much reversed.

There is a demand to bring auto fuels under GST…
I don’t see that ever happening. The Union levies cess from petrol and diesel. It’s about 18% or 14% of their entire annual revenue. There is no way they’re going to give that up and put it into GST — number one. Number two, people like us are not interested. Already, the GST system is broken.

Your thoughts on Nirmala Sitharaman’s handling of the finance portfolio?
I’m not qualified to comment. I’ve never handled anything as big as the portfolio she’s handling. No minister operates independently of the political leadership. If I do well, it is because the CM either tells me what to do or allows me to do what he thinks I should do.

How do you view the course of the GST Council from (former FM) Arun Jaitley’s time?
I don’t know what it was like but from what I hear second-hand, (the late) Jaitley had enormous powers of persuasion and was a conciliator by nature. But let us say that’s true, that he was an extraordinarily gifted individual, it is still completely inappropriate that you design a system that only works if you have this extraordinarily gifted individual there.