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GST – Compensation issues – way forward

GST – Compensation issues – way forward

UPSC CSE Mains Syllabus: GS-3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

GST – Compensation issues – way forward

  • Three years after India’s new indirect tax regime was introduced with a slogan of ‘One Nation, One Tax’, it faces an existential crisis. GST had many issues like – too many rates, complex compliance requirements and multiple mid-course changes.
  • However, the implementation of the Goods and Services Tax (GST), overseen together by the Centre and the States, had begun to almost serve as an exemplar of co-operative federalism.
  • All of those gains have quickly unravelled as the slowdown in the economy, exacerbated by the COVID-19 lockdowns.

Compensation issue:

  • The Centre is obliged to pay to the States, for a period of five years, compensation for revenue shortfalls in return for their having ceded the power to levy the multiple taxes that were subsumed into the GST.
  • In the recent GST council meet the Centre announced that it will not be able to meet the compensation shortfall.
  • With GST collections sharply undershooting all targets this year, the Centre estimates compensation payable for the full year at ₹3-lakh crore. But just ₹65,000 crore is expected in the cess kitty used to pay out the compensation.

Centre’s reasoning:

  • The Centre contends that only ₹97,000 crore of the revenue shortfall is from implementation of the GST, while ₹1.38-lakh crore is due to extraordinary circumstances posed by an ‘Act of God’ (the pandemic).
  • The Finance Ministry has argued that higher borrowing by the Centre will push up interest rates and dent India’s fiscal parameters.

Options for the states:

States have now been given two options, both requiring them to borrow from the market.

  • States can either borrow ₹97,000 crore, without having it added to their debt and with the principal and interest paid out from future cess collections.
  • They can borrow the entire ₹2.35-lakh crore shortfall, but will have to provide for interest payments themselves.

How has the state reacted:

Several States have rejected both options and some, including Tamil Nadu, have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.

What is needed: 

  • The Centre’s undertaking to give that compensation is unconditional. 
  • If the cesses that were identified as sources for mobilising the funds needed for compensation of shortfall themselves fall short of what is required, then that is an issue. 
  • The Centre should make additional borrowings to fulfil its promise and fiscally empower the states. 
  • The GSTcompensation Act 2017 guarantees a 14% annual growth in tax revenues for the states from the amount collected by them in 2015-16 for five years till 2022. This promise has to be kept.  
  • While the Act identified some cesses to finance such compensation, nowhere does the Act say that such compensation would be made only from the proceeds of that cess. 
  • Nor is such an interpretation in the spirit of the undertaking made by the Centre to bring the states on board to launch GST, to compensate them for any revenue shortfall.
  • The states themselves are deprived of adequate finances to boost their economy. Hence, it is time to look for alternatives.
  • The Centre could raise special loans against future GSTcess accruals in order to help meet its compensation promise to States.  
  • Given that states account for more than half of the total general government expenditure, the Centre on-lending its market borrowings to them is the best way to revive the economy.

Such compensation is essential, not only to prevent the federal fabric from fraying but also to enable the states to pull their weight in the fiscal stimulus the economy needs in the face of an unprecedented blow. 

Source :”The Hindu”.


Possible UPSC Mains Question:

Goods and Services Tax (GST) which had begun to almost serve as an exemplar of co-operative federalism has now been disrupted due to the compensation issue between the centre and the states. Discuss.