Skip to main content

GST payment to states a must to 'stimulate' demand amidst pandemic, recession

By Dr Arjun Kumar*

Since 2017, India has been governed by a single tax regime with the introduction of Goods and Services Tax (GST) after almost two decades of deliberations and hard work. It has facilitated the unification of the Indian market by allowing free movement of goods and services across the state borders which, earlier, acted as the major barriers in such mobility.
The multiple tax rate slabs for different categories of product, processes glitches and inadequate IT infrastructure, exclusion of alcohol, electricity, real estate, petroleum, and slowing down of the growth rate has made this system more complicated overtime.
GST system has found itself in a very awful situation following the Covid-19 pandemic and ensuing economic downturn prevailing in India. The states have now started to claim their share of compensation from the Union government which, albeit surprisingly, has expressed its inability to pay the compensation to states due to the revenue foregone and current financial constraints. Government of Kerala has even defined this denial as “betrayal of trust”.
The impending GST compensation to state governments needs to made available sooner for effectively stimulate aggregate demand, in the spirit of the cooperative and fiscal federalism, especially during the pandemic and recession. Further delays would not minimise the collateral losses and only make the situation worse for the economy and GST system, getting to a situation which can be called – too late too little.
The current GST conundrum, pandemic and recession, clearly is more than a short term and rather medium-term challenge. To overcome this situation, coordinated efforts of centre and state governments in federal system are necessary. Nonetheless, sufficient ingredients need to be instil trust and confidence among each other towards realising the vision of $ 5 trillion economy, New India, and #AtmaNirbharBharat.
With this background, the Impact and Policy Research Institute (IMPRI), New Delhi, organized a webinar and panel discussion, “GST Conundrum: State of India's Indirect Taxation System in the Times of COVID-19 Pandemic and Recession”, on September 11, 2020.
Atul Sarma, Distinguished Professor, Council for Social Development (CSD), New Delhi said that taxation system before GST was not efficient because of multiple nature of taxes coupled with different slabs that dented the revenue earning potentials of the states and thereby, hindering the development of Indian economy.
GST, as an alternative tax regime, has featured in policy discussion since 1950s. A taskforce established in 2003 headed by Prof Vijay Kelkar and the Union Budget of 2006 proposed a GST. After prolonged and in-depth deliberations with the state governments, the Government of India finally introduced the GST or the One Nation One Tax, on July 1, 2017.
In the process of consultation of states, there was an amendment to compensate the states to the extent of shortfall over the 15% of overall tax through the cess to be levied on sin goods. But the compensation mechanism has not yielded an adequate amount of tax proceeds. The maximum amount that can be processed is about Rs 90,000 crore, whereas, the requirement stands at Rs 2.35 lakh crore. The Union government has subsequently suggested two alternatives to states which is being faced with opposition by states.
Prof Sharma expressed his concern for the fiscal health of the Union government in the wake of Covid-19 and attendant unwillingness of the government in compensating the states from the Consolidated Fund of India. He opined that GST was pushed hurriedly with very little attention being accorded to building IT infrastructure necessary for GST implementation.
Prof Rajeev Gowda, ex- member of Parliament, eminent academician, public intellectual and politician, asserted that the then finance minister Arun Jaitley projected 14% increase in tax revenues every year with the implementation of GST, which Prof Gowda said was a very unrealistic assumption. 
He noted two crucial aspects: First of all, there was a surplus in the collection of taxes because the cess was levied on demerit goods and the Union government absorbed this surplus into its own resources. And secondly, when states raised their concern of any future shortfall of tax collections, then the Union government ensured them of due compensation.
But the Union government’s recent announcement regarding their inability to compensate is clearly antithetical to the constitutional amendment of GST Compensation Act, Prof Gowda said, adding, states are at forefront in fighting Covid-19, but they have not been allocated enough resources, not even the constitutionally mandated compensation on account of shortfall in tax revenue.
So, states are essentially left with two options – either to cut capital expenditure or to borrow. In case of borrowings, the state will have indirect sovereign guarantee on their loans unlike the center having better capacity to borrow at lower rates as well as repay their loans, he asserted. 
According to Prof Gowda, one possibility could be to borrow in one tranche and then allot the same among the states according to the Finance Commission formulae. The Union government could also raise loans from multilateral institutions. But the response by the Central government to the states' losses demean the ethos of federalism. The states may now start introducing emergency surcharges to raise resources. They may also borrow and pay off debts over a course of time.
R Kavita Rao, director (acting) and professor, National Institute of Public Finance and Policy (NIPFP), New Delhii, said that initially the compensation package was designed in a generous manner to encourage states to accept the new tax regime for first five years. Thereafter, the issue of stabilisation of GST system and revenue neutral system was expected to be tackled between centre and states. However, the current pandemic has brought the parties to face a very tough reality.
The Union government underwrites the potential losses since resources can be raised from anywhere to meet the shortfall. Recent financial downturn reduces the revenue of the governments, and, at the same time, increases the compensation requirements of the state governments. One way to meet the revenue shortfall is to increase the cess rate which could, however, be ineffective during economic crisis, Prof Rao said.
TK Arun, editor, “The Economic Times”, said that any compensation mechanism involves injury, an injured party and the party responsible for providing compensation. In the present case, the Union government expects the state governments – the injured party – to compensate themselves. This situation is becoming a repentance for states for accepting the GST regime.
By forcing state governments to borrow to meet their revenue shortfall would effectively increase the burden on the economy in coming years as they will get trapped in the debt spiral. Moreover, the tax to GDP ratio is lower than 16% and after the introduction of GST, the proportion of indirect taxes on GDP has remained unchanged (around 9% of GDP), which means tax burden has never gone up or gone down, though the tax collections should have been increased, Arun said.
He stated, many products such as petroleum, tobacco, alcohol, power which are major revenue earners are left out of the GST tax slab. Revenue potentials of GST could be enhanced by bringing all these products into the GST network, and undertaking complete tax audit trial for efficacy in overall tax collection, regime and public finance. It would then be easier to catch hold of the tax evaders. Rigorous audit trail under GST needs to be supplemented with requisite economic analysis, harnessing digital technology like big data analytics, AI.
Dr Suranjali Tandon, assistant professor, NIPFP, New Delhi said that the recent GDP numbers have shown contraction of almost 24% with severe negative impact on tax collections. Among the sectors, real estate and construction has been hit hard followed by the manufacturing sector. Only the agricultural sector has experienced positive growth of 3.5%. This implies that GST burden will be carried out by certain sectors.
---
*Director, IMPRI and China-India Visiting Scholar Fellow, Ashoka University

Comments

TRENDING

Insider plot to kill Deendayal Upadhyay? What RSS pracharak Balraj Madhok said

By Shamsul Islam*  Balraj Madhok's died on May 2, 2016 ending an era of old guards of Hindutva politics. A senior RSS pracharak till his death was paid handsome tributes by the RSS leaders including PM Modi, himself a senior pracharak, for being a "stalwart leader of Jan Sangh. Balraj Madhok ji's ideological commitment was strong and clarity of thought immense. He was selflessly devoted to the nation and society. I had the good fortune of interacting with Balraj Madhok ji on many occasions". The RSS also issued a formal condolence message signed by the Supremo Mohan Bhagwat on behalf of all swayamsevaks, referring to his contribution of commitment to nation and society. He was a leading RSS pracharak on whom his organization relied for initiating prominent Hindutva projects. But today nobody in the RSS-BJP top hierarchy remembers/talks about Madhok as he was an insider chronicler of the immense degeneration which was spreading as an epidemic in the high echelons of th

Central pollution watchdog sees red in Union ministry labelling waste to energy green

By Chythenyen Devika Kulasekaran*  “Destructors”, “incinerators” and “waste-to-energy (WTE) incineration” all mean the same thing – indiscriminate burning of garbage! Having a history of about one and a half centuries, WTE incinerators have seen several reboots over the 19th, 20th and 21st centuries. 

First-of-its-kind? 'Eco-friendly, low cost' sewage treatment system installed in Gujarat

Counterview Desk Following the installation of the Unconventional Decentralized Multi-Stage Reactor (UDMSR) for sewage treatment, a note on what is claimed to be the  first-of-its-kind technology said, the treated sewage from this system “can be directly utilized for agricultural purposes”, even as proving to be a “saviour in the times of water crisis.”

A Hindu alternative to Valentine's Day? 'Shiv-Parvati was first love marriage in Universe'

By Rajiv Shah*   The other day, I was searching on Google a quote on Maha Shivratri which I wanted to send to someone, a confirmed Shiv Bhakt, quite close to me -- with an underlying message to act positively instead of being negative. On top of the search, I chanced upon an article in, imagine!, a Nashik Corporation site which offered me something very unusual. 

Indo-Bangla border: Farmers facing 'illegal obstacles' in harvesting, transporting yields

  Counterview Desk  In a representation to the chairperson, National Human Rights Commission, human rights defender Kirity Roy, who is secretary, Banglar Manabadhikar Suraksha Mancha (MASUM), has said that Border Security Force (BSF) personnel are creating "illegal obstacles" for farmers seeking to harvest their ripened yields and transport them to the market in village Jhaukuthi of Cooch Behar district.

Wasteland, a colonial legacy, being used to 'give away' vast tracts to Ratnagiri refinery

By Fouziya Tehzeeb* William D’Souza, a 55-year old farmer from Kuthethur, Mangalore, was busy mixing cattle feed when we arrived at his doorsteps. Around 25 km from the bustling city of Mangalore, Kuthethur is a lush green village with thick vegetation. On the way to William’s house the idyllic view gets blocked by the flares and smoke arising from the Mangalore Refinery and Petrochemicals Limited (MRPL).

'Flawed' argument: Gandhi had minimal role, naval mutinies alone led to Independence

Counterview Desk Reacting to a Counterview  story , "Rewiring history? Bose, not Gandhi, was real Father of Nation: British PM Attlee 'cited'" (January 26, 2016), an avid reader has forwarded  reaction  in the form of a  link , which carries the article "Did Atlee say Gandhi had minimal role in Independence? #FactCheck", published in the site satyagrahis.in. The satyagraha.in article seeks to debunk the view, reported in the Counterview story, taken by retired army officer GD Bakshi in his book, “Bose: An Indian Samurai”, which claims that Gandhiji had a minimal role to play in India's freedom struggle, and that it was Netaji who played the crucial role. We reproduce the satyagraha.in article here. Text: Nowadays it is said by many MK Gandhi critics that Clement Atlee made a statement in which he said Gandhi has ‘minimal’ role in India's independence and gave credit to naval mutinies and with this statement, they concluded the whole freedom struggle.

CAA disregards India's inclusive plural ethos, 'betrays' ideals of freedom struggle: PUCL

Counterview Desk    "Outraged" at the move of the Central government to implement the Citizenship Amendment Act, 2019 (CAA 2019) weeks before the election, the top rights group, People's Union for Civil Liberties (PUCL), has demanded that the law be repealed. 

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

Sections of BSF, BGB personnel 'directly or indirectly' involved in cross border smuggling

By Kirity Roy*  The Border Security Force (BSF) of India and the Border Guard Bangladesh (BGB) of Bangladesh met for 54th Director General level meeting at Dhaka, Bangladesh, on 5th to 9th March, 2024 to discuss on minimizing killings at border area, illegal intrusion, trafficking of drugs and other narcotics, smuggling of arms and ammunitions and other crimes at bordering areas. Further, the summit had an agenda to discuss on overall development in 150 yards area at both sides of the border and design an activity plan for the same.