Leaving States High And Dry

Context: Government of India’s (GOI’s) denial of compensation payment to states demonstrates a betrayal of trust, which is a prerequisite for cooperative federalism and economic recovery.

Features of Goods and Services Tax (GST) Regime: it was built on the foundation of trust, which was established through the following provisions: 

• States are allocated two-thirds of the votes in the GST Council while GOI held the rest. 
• States are compensated: for revenue losses that were expected after GST’s implementation. 
• The GST (Compensation to States) Act, 2017, mandated compensation to states for five years to the tune of annual growth of 14%. 
• These funds were to be collected by levying a cess on certain demerit goods.

Issues with the GST:

• Denial of Mandated Devolution: GOI has provided states far less than 42% of tax collections mandated by the 14th Finance Commission (reduced by 1% by the 15th Finance Commission). 
• For, E.g. States received about 30% of central tax collections during 2015-19. Revised estimates for FY2020 of state budgets shows this has fallen to 24%, - Accountability initiative’s Analysis.
• Denial of Compensation: While the Centre collected more cess than the compensation paid to the states in the first two years, now when there is a shortfall, it now denies the compensation.
• Fund shortages have forced states to resort to increasing excise on liquor and value-added tax (VAT) on petrol and diesel and market borrowings with steep rates.
• Cornering of the benefits by the Centre in the past:
• GOI has levied various cesses and surcharges that generate revenues outside the divisible pool, which it doesn’t have to share with states. 
• For, E.g. GOI didn’t pass on the benefits of :

• Lower international crude oil prices.
• The imposition of more tax and cesses on petrol and diesel.
• Centre-State sharing of petroleum tax revenue has shifted towards Centre: from 50:50 in 2013-14 to 60:40 in 2018-19.

• Additional levies at the state level pose a risk to the very concept of a uniform national tax regime under GST.
• Some states had to resort to increasing excise on liquor and Value Added Tax (VAT) on petrol and diesel. 

Way Forward

• GOI can borrow from the market at lower rates than states.
• Address the growing demand to extend the GST compensation period to 10 years.
• GoI must ensure a voluntary cessation of cesses, which are non-shareable with states.