The Centre and state governments seem to be on a collision course amid a sharp economic downturn that has eroded their financial positions. Fifteenth Finance Commission (FFC) chairman N.K. Singh on Friday sought a leverage with the Goods and Services Tax (GST) Council, arguing that tax rate cuts and grant of exemptions decided solely by the council affects the FFC’s goal of optimizing revenue targets of the Centre and states.
Finance commissions look at projections of revenue and spending, but GST rates, exemptions, changes and implementation are the domain of the GST Council. “This leads to unsettled questions on the ways to monitor, scrutinize and optimize revenue outcomes," said Singh, while delivering the L.K. Jha Memorial Lecture in Mumbai.
He said the demand from states for extending the GST compensation given to them for revenue shortfall beyond the currently agreed 2022 will also have a bearing on the formula the FFC is set to recommend shortly on how the Centre should share its tax revenue with states.
Singh’s comments assume significance as they indicate that the FFC’s suggestions for revenue sharing could be more tight-fisted than states expect, which could trigger more friction between the Union and state governments.
The Narendra Modi government is facing the challenge of finding the money for higher welfare spending on schemes such as farmers’ income support, as well as the burden of compensating states, when its own revenue growth is sluggish.
The FFC recommends a formula for sharing the Centre’s direct and indirect revenues, barring cess.
The funds needed for compensating states for their GST shortfall are raised through a GST cess on items like tobacco. The central government needs to give GST compensation till 2022, the fifth year of the indirect tax reform.
The FFC’s formula for revenue sharing is effective for five years from April 2020. An extension of GST compensation to states beyond 2022 will impact the last three years of the period, for which FFC’s recommendations will apply, that is between FY23 and FY26.
“The symmetry in the working of the GST Council and the Finance Commission deserves serious considerations," said Singh.
Singh also called for a fresh look at Schedule 7 of the Constitution that assigns lawmaking powers on various subjects to Central and state governments. “The facts and circumstances on fiscal federalism have changed. Time to change our mind," Singh said.
He argued for simplifying GST, something he said could yield more revenue receipts. “The cumbersomeness of compliance is one of the important factors why I believe there is a huge scope of improving the revenue realization from GST. Equally, I do believe that the frequency with which the rates have been changed is unbelievable…. We need to go back to the drawing board, the time for a grand bargain."
Singh argued that the nature of governance has changed fundamentally, with the Central government taking the lead in several national priority areas such as drinking water and power supply. He also said an expert group should look into rationalization of centrally-sponsored schemes.