Over-Promise to Under-Deliver

CONTEXT:  The Centre suggestion to the states to borrow up by themselves in order to meet their deficits goes against the principles of a constitutionally bound agreemen

A brief introduction to Goods and Services Tax: introduced in 2017.

• Creating a common market by having a single indirect destination-based tax across the nation.
  • Before GST, locally produced goods would be levied with central excise duty, central cess, state sales tax which varied depending on the destination state.
  • Uniform tax structure for all goods and services with few exceptions such as petroleum, alcohol and electricity.
• Compensation Cess: Centre has assured to compensate state with minimum assured compound annual growth rate of 14%, with a base year of 2015-16 and till five years, due to revenue shortfall.
  • For compensation, Compensation cess is levied on sin goods such as tobacco and on luxury goods such as automobiles and will be transferred to the compensation fund.

Options Provided by the Finance Minister: amidst COVID crisis to make up for compensation payment to the states.

• Option 1:
  • Shortfall to be categorized into shortfall due to GST and shortfall due to COVID.
  • Shortfall due to GST is approx. Rs 96,000 crores, which states can borrow from RBI on rates close to centre government borrowing rate.
• Option 2:
  • Full amount of 2.35 lakh crore can be borrowed by states.
  • The Centre will relax the borrowing threshold in Fiscal Responsibility and Budget Management Act.

Issues with the GST:

• Size of the compensation: The reward for the states’ assent to the GST was locked into a minimum indirect tax revenue growth of 14% a year for the first five years.
  • However, after the fall in the GST revenues and forthcoming pandemic, the compensation was rendered insufficient.
• Delayed Payment: The Centre delayed its payment even after collecting surplus for the first two years.
• Assault on Fiscal Federalism: With the Centre citing no legal obligation to borrow to pay this shortfall to the states the ethical aspect of fiscal federalism is ignored.
  
  

Conclusion: Each state has one vote in the GST council, and with the serving party in majority of states as well, it is likely that option 1 is selected, which goes against the constitutionally bound agreement with sovereign browbeating states into no fault of their own.