An Odd Divergence between India and its Constituents

Context: This year’s COVID pandemic has strained the fiscal positions of both the central and state governments. 

A larger issue is the differences in the abilities of states to plug leakages and improve compliance.

Achievement of Goods and Service Tax (GST):

• Attempt at economic integration: Removed different taxation regimes and Eased the mobility of goods and services by removing state-level entry barriers.
• Enhanced buoyancy: owing to the improved compliance due to a simplification of the taxation system and rationalization of rates (from 14.4% in 2017 to 11.6% recently.)
• Sustained improvement in compliance: There has been an increase in indirect tax collections since the introduction of GST.

Issues with the GST:

• Difference in achievement between the states: Only a few states have managed to achieve the desired GST revenue targets.
• Impact of COVID: has strained the fiscal positions of both the states and the Centre leading to an undesired conflict, though largely has been resolved through cooperative federalism.
• Difference in the abilities of the states: Since GST revenues depend on the extent of economic activity, states that are able to do better in promoting commerce would succeed in meeting their targets.

Way Forward:

• Ensure GST compliance in states: While large states must examine the issue of GST compliance and also find ways to increase economic activity within their borders; other states must address local factors.
• Routine relook at tax changes: proposed by GST council with their impact on economic growth.
• Incentivize states: to help them effectively realize their GST potential.
  • For E.g. North Eastern states have witnessed a modest increase in indirect tax collection due to plugging of leakages and centres assistance for the development of the region.
  • For E.g. A part of the relaxation in borrowings under the Atmanirbhar Bharat plan was linked to state-level reforms in areas like agriculture, land, and labour is a welcome step.

Conclusion: GST has been one of the most significant economic reforms undertaken since Indian Independence. There is a need to address state-specific issues in realizing the true collections.