GST’s Blindspot : Cities Lose Power To States & Urban Governance May Suffer

With the passage of the Goods & Services Tax Bill in the Rajya Sabha yesterday ( 3 August ), it is now certain that we will move to this form of indirect taxation by mid-2017. While it is easy to blame the Congress for this delay, the real reason why it has taken a decade from idea to implementation was the enormous resistance put up by states to safeguard their financial autonomy – a chapter where the last word is yet to be written.

The bill is becoming law due to a coalition of poor (and consuming) states deciding that they had more to gain than lose from it, and with the BJP checking the opposition of the nay-saying richer (production) states – Gujarat and Maharashtra, among them. The lone holdout, Tamil Nadu, has been isolated. GST, as a destination-based tax, shifts revenue power from manufacturing states to consuming states.

In a sense, thus, the GST law is the result of the gang-up of the poor against the rich; states now can now eat their cake and have it too. If anything goes wrong with GST, the centre will be blamed. If revenues fall short, the centre will have to pony up.

However, there is one area where the GST, by pandering to state power, may have done lasting damage: urban centres.

In their zeal to obtain more revenues for themselves, state governments have sold the interests of high-revenue earning cities that are India’s real engines of growth and jobs down the river. This has been done by states agreeing to abolish octroi, entry tax and local body tax, all lucrative sources of income for municipal corporations like Mumbai, Pune and Pimpri-Chinchwad, the last of which houses India’s big auto giants.

Consider the case of the Mumbai Municipal Corporation, which had an annual budget of over Rs 33,500 crore, and estimated revenues of Rs 23,509 crore in 2015-16. A third of its revenues comes from octroi – over Rs 7,700 crore (though the fall in oil prices has ensured that this budgeted revenue has not materialised during the year). The city’s other major sources of revenue are property taxes (around a fifth of income), and another quarter from the development plan (Rs 5,824 crore). It gets very little from water and road taxes. If Mumbai has to regenerate more direct income, it will have to boost property, water and vehicle taxes by huge amounts – and still not cover the octroi losses.

In Pune and Pimpri-Chinchwad, octroi was replaced with a local body tax by the previous Congress-NCP government, but the NDA coalition that came to power in 2014 abolished this tax as it was opposed by traders.

There are two issues that arise from the GST promises made by states like Maharashtra:

#1: If octroi and entry taxes go, the state will have to keep its own GST rate high enough to cover for the losses or demand higher compensation from the centre.

#2: Even if the loss of city revenues is compensated by state or centre, the city inevitably loses a buoyant and regular cash flow source. State governments cannot be relied up to deliver the cash on time, leaving municipalities begging for money and not doing their jobs.

Octroi, let us say upfront, was a bad tax, creating unnecessary stoppages of thousands on trucks daily while entering cities. Its abolition is thus good for reducing pollution and corruption, and improving inter-state commerce.

But these gains will have an unintended consequence, which is a further deterioration in city finances and governance. It will now become easier to blame the state government or the centre for lack of funds to fill potholes, remove garbage, or deliver better water and sewerage infrastructure.

City governments are already incredibly corrupt as real power rests with state-level urban development departments, who appoint municipal commissioners to oversee the interests of rural politicians. Elected city councillors are thus focused not on running the city well, but in making money from the award of civic contracts. The elected mayor in every city barring Delhi (where the mayor is called Chief Minister) is a joke. He or she is there for ribbon-cutting ceremonies and public functions, but has no power to do anything for the city he or she heads.

Now, with octroi going, city governance will begin to suck. Really suck. GST has done damage to urban centres. These are the places that will create jobs and wealth, and we are strangling them in the name of GST.