The Future of GST Hangs in the Balance

Context: The central government is best positioned to raise additional resources to bridge the Goods and Services Tax (GST) compensation gap.

Background to the Issue of the GST Compensation Gap: 

• In 2017, the Centre made a promise to the States that a certain minimum amount of GST revenues will be guaranteed to every State for every year until 2022. 
• Now, there is not enough money in the GST compensation fund for the Centre to honour its obligations.
• The Centre has subsequently asked the states to borrow money to bridge this gap, and it will act as a guarantor to facilitate this borrowings.
• Out of the 31 States in the GST Council, while 20 states have approved of the Centre’s plan, 11 states ruled by the Opposition have rejected the same.

Arguments against the Centre’s plan

• Widening of the trust deficit: The trust between the Centre and the states has been impacted due to the recent Comptroller and Auditor General’s (CAG’s) allegation of misallocation of funds in the past.

• • • The Centre deliberately misallocated nearly ?3 lakh crore collected through various cesses, to reduce the States’ share of tax revenues. 

• Economic Mis-representation of the states in the GST Council:  

• The 11 opposing States account for a greater share of overall GST revenues than the 20 supporting States, but it does not matter since each State has an equal vote. (12 votes can veto a proposal)

• Each State’s economic realities are different:

• While Maharashtra, Gujarat, Tamil Nadu and Karnataka account for nearly as much as the remaining 27 states and Union Territories (UTs), Maharashtra and Tamil Nadu have opposed the plan.
• GST compensation constitutes a signi?cant share of the revenues of Punjab and Himachal Pradesh, yet Himachal Pradesh supports the Centre’s plan while Punjab is against it. 
• State government’s lack of avenues for raising additional resources: As they don’t have the powers to levy direct taxes or indirect taxes to earn additional revenues. 
• Misguided fears of ‘junk’ rating status: The Centre is cautious of additional borrowing and its implication of credit ratings, offloading the borrowing to states would not help either.
• Politicisation of the GST Council: Shallow rhetoric of ‘cooperative federalism’

• State fiscal policies are complex matters and cannot be decided through a ‘high command whip’.
• A State’s decision to borrow or not should be based on its fiscal situation, not its political affiliation.

Way Forward: 

• Alternative sources for the Centre to generate revenue: by the way of increased taxation on capital market transaction.

• Between April and June, India’s stock markets experienced the highest activity levels in its history, with a 75% increase in transactions vis-a-vis last year. The stock market rose by 30% in the period.
• Potential: A ?ve-fold increase in the Securities Transaction Tax (STT) from its current minuscule levels of 0.025% can generate an additional ?50,000 crore of revenue for the Centre. Also, there is no evidence that raising of STT can adversely impact stock market activity.