GST Compensation issue
In News: Centre-state friction is growing over pending GST compensation payments issue under the Goods and Services Tax (GST). The Finance Minister noted that the financial crisis facing the States is a result of an “act of God”.
The Goods and Services Tax in India is comprehensive, multi-stage, destination-based value-added indirect tax. It has replaced many central and state indirect taxes in India such as the excise duty, VAT, services tax, etc.
GST compensation: As per the GST (Compensation to States) Act, 2017, states are guaranteed compensation for revenue loss on account of implementation of GST for a transition period of five years (2017-2022).
- The compensation is calculated based on the difference between the current states’ GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.
- Any shortfall has to be compensated from the receipts of Compensation Cess imposed on selected commodities that attract a GST of 28 percent.
- At present, the cess levied on sin and luxury goods such as tobacco and automobiles flow into the compensation fund.
The solution presented by the government on GST Compensation issue
Two options presented by Centre for borrowing by States to meet the shortfall:
Issues with the options:
Issues between Centre and States over GST compensation:
- The constitutional mandate not followed: Centre needs to honour the constitutional promise and reimburse the shortfall in tax revenues.
- Issues of compensation: As per the estimates, the States’ GST revenue gap in 2020-21 will amount to about ₹3 lakh crore, while cess collections are only projected to reach ₹65,000 crore, leaving a shortfall of ₹35 lakh crore.
- Manufacture and sale of liquor is one of the major sources of state’s revenue: the centre has placed restrictions on bars/liquor sale for long time. Excise duty on alcohol accounts for around 10-15 percent of Own Tax Revenue of a majority of states.
- Less taxation power with states: Using cess for agriculture such as Krishi Kalyan cess and Swachh Bharat cess, the Union is entering domains that are a part of the state list.
- Against fiscal federalism: Unilateral decision by Centre without negotiation can jeopardise the future of GST, which was envisaged as a cooperative initiative.
- Increase burden on taxpayers: The reliance on future compensation means that taxpayers will have to bear the cost.
- State’s opposition: Finance Minister of Kerala said enforcing a cut in compensation and bringing in a distinction between GST and Covid-related revenue loss is unconstitutional. The Chief Minister of Maharashtra has said that it is time to exit the GST. Punjab, Chhattisgarh and Puducherry have voiced their displeasure.
- Stress the finances of the states’: If compensation is not paid to states, economy of states will fail because GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
- Role of agencies in slowdown: During tight Monetary policy in 2017 and 2018 agencies showed higher growth than what actually obtained in 2016-17 and 2017-18. This affected structural reforms and the monetary policy of RBI.
|Does India need a Fiscal council?
Fiscal Council: It is a proposed independent fiscal institution (IFI) promoting stable and sustainable public finance. It must be composed of non-elected professionals to ensure bipartisan support.
Need of fiscal Council:
- Moral obligation to compensate states from the Consolidated Fund of India: Centre is morally obligated to pay compensation to States as states gave away their right of taxation.
- Extend compensation period: Centre can prolong the compensation period beyond July 2022 and offer a greater share of the revenues (the SGST part) to the States.
- Address trust deficit: The Centre needs to deliberate with the states and bridge the alarming trust deficit.
- Reconsider FRBM limit: The centre should allow the states to exceed the FRBM limit by more than 0.5 per cent of the SGDP, as a temporary relief.
- Facilitate borrowing by the states without affecting their debt to GDP ratios.
- Fiscal decentralisation: Of the 12% GST, 10% should be equally shared between the States and the Centre, and 2% must be earmarked exclusively for the urban and rural local bodies, which ensures some basic revenue autonomy to them.
- Single rate GST: There was an original recommendation of a standard rate of 12%, to be fixed for at least a five-year period. It reduces the need to do arbitrary classification and discretion, reduces litigation and will lead to buoyancy in collection. For example; Australia’s GST rate which has been constant at 10%.
- Widen the tax base: GST should progressively include all goods (petroleum and alcohol) and services with very few exceptions, such as food and medicine.
Conclusion: GST is a crucial and long-term structural reform which can address the fiscal needs of the future. Therefore, there is need to strike the right and desired balance to achieve co-operative federalism which will lead to enhanced economic growth.