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Updated: Jan 08, 2017 08:55 IST

Finance minister Arun Jaitley once described demonetisation and the passage of the GST (Goods and Services Tax) bill as two “big-bang reforms” that would change the game. The first — the recall of Rs 500 and Rs 1,000 notes — would destroy illegal wealth held in cash, while a unified and uniform system of indirect taxes that captures every commercial transaction will help curb the creation and flow of black money in times to come, he told delegates at the annual Hindustan Times Leadership Summit held last month.

The outcomes so far, however, have not been what Jaitley had expected. Holders of dodgy cash have managed to beat the system. Almost 97% of the cash held in denominations of Rs 500 and Rs 1,000 have returned to the system, according to a Bloomberg report. There has been no windfall in revenues for the government or the Reserve Bank of India, as was expected by some proponents of demonetisation. Consumer spending and the informal sector have been hit hard, slowing down the economy. Credit offtake remains sluggish although banks, nudged by the government, are lowering interest rates. The bad news doesn’t end there. This past week, demonetisation claimed its latest, and perhaps the biggest, casualty — the much-desired and much-awaited implementation of the GST.

Read | Demonetisation could derail GST, say ministers

A meeting of the GST Council – an empowered group of state finance ministers set up to frame rules, rates and modalities of the new tax system – held through Tuesday and Wednesday ended in acrimony after several states pressed for a review of what had been agreed upon before, in the words of West Bengal finance minister Amit Mitra, the “financial emergency” set in. It is now widely expected that the government will miss the April 1 deadline it had set to give effect to the proposed common tax.

In August, all states and political parties agreed to a constitutional amendment that would make GST a law, on the promise that it would be implemented on the principles of cooperative federalism. Also, it was agreed that states losing revenues because of the common tax would be adequately compensated by transfer of funds from the central exchequer — about Rs 55,000 crore over the next five years. This was a big win for the NDA government because independent India’s biggest tax reform was finally becoming a reality after years of intense negotiations. Demonetisation, however, cut short the euphoria. Several states have now returned to the negotiating table to bargain afresh. They want much more in compensation from the Centre, because their revenues from sales and other local taxes were hit hard as people went short on cash and spending in the aftermath of demonetisation.

That the economy is unlikely to recover soon has added to their fears that they would continue to raise less in revenue than what was projected at the time of agreeing to GST.

Read | HTLS 2016: Demonetisation, GST instances of rapidly changing India, says Jaitley

The demand for higher compensation apart, new fault lines have surfaced within the GST Council, which is finding it difficult to reconcile differences between the Centre and the states in matters relating to jurisprudence and control — who taxes whom and what. Some state finance ministers have gone to the extent of accusing the Centre of reneging on the principles of cooperative federalism. If that sense is to gain ground, then we might be looking at a scenario where the government at the Centre will be too weakened to push through reforms or changes that need states to be on its side. It could well turn out to be a repeat of the policy paralysis phase we had seen in the terminal year of the UPA regime.

Read | Won’t be ‘bound’ to a timeline on GST: Arun Jaitley

At the time Parliament passed the GST bill, Prime Minister Narendra Modi had described it as “a great step by team India.” It is up to him now to rekindle the spirit of “team India”.

The author is Chief Content Officer, Hindustan Times

Follow the author @rajeshmahapatra