On the GST Issue, the Centre Holds the Baton

Context: In the light of declining states financial situation amidst pandemic, a large borrowing programme is inevitable, and the Centre should push for the same.

Promises by the Centre

• Higher revenue collection: States were lured by the promise of 14% annual growth in GST revenue over the base year of 2015-16. 

• Compensation for five years: Any shortfall from  14% annual growth in GST revenue was to be compensated by levying a cess on luxury and sin goods.

Centre gave the States two options instead of revenue compensation

• Borrow from RBI: Borrow ?97,000 crores (the shortfall in the GST revenue compensation) from the Reserve Bank of India (RBI) 

• Borrow from the market: Borrow ?2.35-lakh crore (the total compensation shortfall) from the market with the RBI facilitating it.

• Compensation cess could be extended to facilitate the repayment of the debt.

Concerns

• No guarantee about continuing the cess beyond 2022:  while the statutory provision of 14% increase is being given up, then how sacrosanct will something that is not even a part of the GST Act is a matter of concern.

• Inaccurate estimates: The accuracy of the estimates of ?97,000 crore and ?2.35-lakh crore offered to the States is unknown

• Low Budgetary Space: 

• Union Budget 2020 assumed a nominal growth of 10%, but it is likely to contract  by at least 10%
• Centre’s budgetary calculations will be off by at least 20%.

• Revenue Shortfall:

• Corporation tax collection will fall sharply: Much more than 20% compared to the budget estimate. This is due to losses in sectors such as airlines, hotels and consumer durables

• Income tax collection will fall: due to 

• Loss of employment: Since a large number of workers have lost employment and/or have faced salary cuts.

• Losses for private firms

• GST collection will be short by much more than 20% due to:

• Severe impact on the production of luxury and sin goods, which pay the high rate of tax — 18%, 28% and cess on top.
• Low tax collection from essential goods and services: which either pays 0%, 5% or 12%
• Drastic fall in imports- Integrated Goods and Services Tax (IGST) and customs duties will also decline

• Expected fall in indirect tax/GDP ratio: 

• It can be expected to fall from 10.5% to 8% resulting in a drop of ?7 lakh crore.

• About 60% of this loss will be from GST, and half of that would be the loss of States.

• Deteriorating States finances : 

• States GST shortfall would be about ?2.1-lakh crore
• States will lose 42% of the shortfall in the Centre’s collection — so another ?88,000 crores. 
• Even if the economy declines by only 10%, the total tax collection will be down by about ?12-lakh crore in 2020-21. The States will lose ?6.4 lakh crore. 
• Therefore, states would have an uncovered deficit of ?4-lakh crore.

Conclusion: There is a need for a much large borrowing programme, and only the Centre is in a position to do such massive borrowing.