GST Bill: A Successful Exercise of Consensus-Building in Democracy

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Image courtesy of The Indian Express

Bhavani Castro is a Fellow of Indian Studies, Getulio Vargas Foundation in São Paulo

The first half of 2016 was marked by several setbacks for democratic institutions and liberal values all over the world. From the Turkish government’s repressive response after the failed military coup to the rise of radical parties in Europe, a controversial impeachment process in Brazil and the rise of Donald Trump in the United States, it seems that democracy has recently been under significant pressure. Intense animosity and partisan divisions are challenging the way democracy works and its core values, undermining decision-making processes in parliaments, blocking key reforms, and leading to authoritarian administrative measures. However, in the midst of many worrying examples of flaws in democratic regimes in different parts of the world, it is possible to identify one case of significant success when it comes to democracy’s capacity to overcome division and build consensus: the passage of a groundbreaking tax reform by the Indian Parliament.

Goods and Services Tax Bill (GST) was passed in August in the Upper House of the Indian Parliament, the Rajya Sabha, and approved by President Pranab Mukherjee on 8 September. The GST, now turned into law, creates a single tax system in India, and represents a significant breakthrough that in practice will transform the Indian states into a common market. This notable success generated little reaction in the international media, especially in emerging and developing countries; however, it holds important lessons on how game-changing reforms can be implemented in a democracy.

The world should look at the ratification of the GST law as a substantial example for effective democracy for a variety of reasons. First, it shows the capacity of a messy, multiparty parliamentary system. Since the 1990s, the Indian government needs to recur to coalitions to rule at the national level, as the increasing number of national and state parties make it impossible for a single party to rule alone. This means often making deals and negotiating not only with the opposition, but also with strong regional parties that seek policies that benefit only – or mostly – their local constituencies. Similar phenomena are visible in other large democracies like Brazil, where large coalitions make governing extremely difficult.

An increase in polarization usually means fewer laws pass in Parliament. For emerging countries like India, where there is a necessity of progressive reforms to manage the economic transformation and push for social improvements, political fragmentation and a lack of consensus building can have devastating effects. To avoid setbacks, the strategy adopted by the Indian government was to engage and include strong regional parties in the discussion, rather than coercing and embracing a combative tone. At the same time, the biggest opponent, the Congress Party, was slowly isolated and eventually, faced by the risk of having its image damaged, had to accept the bill and enter the negotiation. Consequently, opposition parties contributed to changes in the bill, while the ruling coalition yielded to demands and offered concessions in the final written version. The process was not simply an exchange of favours as it is usually observed in multiparty democracies, but instead a conciliatory process of political commitment by all parties involved.

Moreover, the GST, when implemented, will go against an ongoing international trend of isolating peoples and markets – the new tax system has even been called a “reverse Brexit”. While the European Union is going through one of its biggest crises – with rise in partisanship and the exit of an important economic member – India is showing the world that democracies can do better. The new tax system will replace dozens of different tariffs that made selling a product to another Indian state as hard as selling products abroad. That means connecting 1.2 billion people in a European-style market and an expected increase of 1-2 per cent to the country’s GDP growth rate.

Finally, it is important to consider the dimension of this tax reform. The GST was designed along the lines of the value-added tax (VAT) model from OECD countries, and it is considered a key reform for restructuring economies. For India, it is one of the biggest institutional reforms since its independence in 1947. Most countries still struggle to enact legislation that will lead to this type of revolutionary work, as it can negatively affect some industry sectors and interest groups. Brazil, another populous democracy, has been trying for years to design a tax reform to substitute its inefficient system; however, it never even managed to produce an initial project for a new tax scheme. India’s lessons on the GST law-making process could be extremely valuable for countries like Brazil, which could follow India’s steps: first creating a highly skilled committee to design a uniform tax system, and then submitting the initial proposal to the legislative for a comprehensive discussion and adjustments between all political parties.

India still faces many problems threatening its democracy, including an ongoing civil upsurge in Kashmir, suppressed by the government, and a severe water-sharing dispute that increases tensions between southern states. However, in the case of the GST process, the government proved that it is possible to use democracy as a tool to reach potentially painful but necessary reforms in a pluralistic country. It took more than a decade to pass the GST Bill, but democracy is a slow process and does not provide fast solutions to urgent problems. India’s political system can be inefficient, polarized, disorganized and sometimes exhausting, but hopefully this experience will be a positive example for other democratic countries still struggling with much-needed institutional reforms.

Bhavani Castro is a Fellow of Indian Studies, Getulio Vargas Foundation in São Paulo

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One Response to GST Bill: A Successful Exercise of Consensus-Building in Democracy

  1. Hemant October 29, 2016 at 6:00 am #

    An article that brings out strengths of democracy. The big challange to democracies is to see how contries like China prosper without democracy. Is China a better model that is to be adopted for progress?

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