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Rising discontent over GST between Center and States

Admin October 23, 2020

The situation arising due to the lockdown due to Covid-19 and adverse effects on the economy will have to be faced by all together. The Central Government has given a good option to the states to compensate the revenue, which has also been accepted by many states. It may be hoped that a solution, acceptable to all, maybe reached in days to come. — Dr. Ashwani Mahajan

Goods and Services Tax (GST) was introduced in India from the month of July 2017, subsuming almost all indirect taxes of Centre and States. Significantly, total revenue from this tax is shared between the Centre and States equally. Over and above this, half of GST revenue going to states, based on the recommendations of the Finance Commission, states get a share in all taxes of the Union. Currently this share is 42 percent. Thus we can say that 71 percent of the total GST receipts go to the states. At the time of implementation of the GST system, there were apprehensions among the states that their revenue could fall in the new system; hence many states were opposed to the implementation of the GST system. In such a situation, the then Union Finance Minister Arun Jaitley suggested a formula, according to which the states were not only assured of the revenue received from their taxes subsumed under GST, but they were also guaranteed a 14 percent increase every year. Such an arrangement was to last for 5 years.

The central government had expected that GST being a goods tax reform, will not only increase efficiency in tax collection, but will also prevent tax evasion. GST being a value added tax will also eliminate the cascading effect on taxes. This means that on the one hand the tax revenue will increase, on the other hand consumers will also benefit from this system, because it will also reduce the prices. Though, GST took some time to settle down, and in the meanwhile, the total receipts from GST kept on fluctuating. While the government had expected the total receipts from GST to be at least Rs 1 lakh crore every month, GST receipts could reach 1 lakh crore or more in only 9 months in the 30 months of GST up to December 2019. One of the main reasons for this was lower than expected GDP growth in the country, during that period and teething troubles of GST. Naturally due to this, the burden on the Central Government as per their promise to compensate the states kept increasing. Significantly, the Center decided to make up for the loss of the states, by imposing a ‘Compensation Cess’ on GST. This compensation was Rs 41146 crore in the year 2017-18 and Rs 69275 crore in 2018-19. Although the average receipts of GST stood at around Rs 1 lakh crore in the year 2019-20, the amount of compensation by the states was more than that of last year.

While balance of the previous year was still pending, that from the very first month of the new financial year 2020-21, the GST receipts dipped down due to the lockdown caused by Covid-19 pandemic; and we see that the total receipts of GST during Covid-19 period were extremely law Rs. 32172 crore, Rs 62152 crores, Rs 90917 crores, Rs 87422, Rs 86449 crores and Rs 95480 crores in the months of April, May, June, July, August, and September respectively. Though GST revenue is returning back to track, as the process of unlock proceeds, however, despite the loss of revenue, the liability of Centre continues to pile up due to centre’s pledge to make up for any loss of revenue, with 14 percent guaranteed growth. In the current scenario, since the centre’s revenue has also shrunk, the central government is also finding itself unable to fulfil this liability.

Under these circumstances, a meeting of the GST Council was held on October 12, 2020, but a consensus could not be reached on the issue. Significantly, there will be a shortfall of revenue of Rs. 2.35 lakh crore in the current financial year. The Central Government has suggested to the states that they can start borrowing, to meet this shortfall; but no consensus could be reached in GST Council in this matter.

The central government has given two options to the state governments. First option is that, the state governments will borrow Rs 1.1 lakh crore to compensate for the loss of this revenue and both its principal and interest will be repaid from future ‘Compensation Cess’ levied on luxury goods and sin goods like cigarettes etc. The other option is that the state governments will borrow the entire shortfall of Rs 2.35 lakh crore, but in that case only the principal will be paid fully from the cess, but states will have to bear a significant part of the interest liabilities themselves.

Finance Minister Nirmala Sitharaman, who is also the ex-officio chairperson of the GST Council, has said that most states are ready to start borrowing. So although no consensus could be reached, the Central Government says that if a State Government wants to start the process of borrowing; neither the Central Government nor the GST Council can stop it. The indications coming from GST Council show that 21 states, where the Bharatiya Janata Party or their coalition is in the government, are ready to move forward by accepting the loan option of Rs 1.1 lakh crore, while the remaining 10 states have rejected the option. The argument of finance ministers of the opposition governments is that this type of borrowings option is illegal as it will push the revenue sharing arrangements beyond 5 years, which would be against the GST Act. Finance Ministers of the opposition parties’ governments also say that such decisions should be made in the GST Council and the same would be appropriate for cooperative federalism too.

Significantly, 21 states which are ready to borrow, have also agreed to only the first option. But the finance ministers of opposition parties’ governments are not ready for that either. It has to be understood that in the present era, when revenue of the Central Government has reached the minimum level, then it is not practical to expect from the Central Government that the revenue of the states could be compensated immediately. As such, in the past also, the compensation of states’ share of GST had been done through ‘Compensation Cess’. In such a situation, since both the interest and the principal of the loans taken to compensate the revenue of the states are to be repaid from the same cess, the states will not suffer any loss ultimately.

Amid growing disagreement between the Center and the states, the Central Government has made an announcement, according to which a 50-year interest free loan of Rs 12 thousand crore has been provided to the states, which they can use to increase capital expenditure in the states. The situation arising due to the lockdown due to Covid-19 and adverse effects on the economy will have to be faced by all together. The Central Government has given a good option to the states to compensate the revenue, which has also been accepted by many states. It may be hoped that a solution, acceptable to all, maybe reached in days to come.

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