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Business News/ Politics / Policy/  GST consensus under strain as revenues dry up in states

Consensus has guided 40 meetings of the Goods and Services Tax (GST) Council since its inception, but differences between the Centre and fiscally stressed states within the federal tax body are becoming increasingly difficult to reconcile.

The council, which will meet later this month, is set to see sharp differences emerge over the central government’s obligation to make up for states’ GST losses, which has gone up due to the two-month national lockdown to contain the coronavirus pandemic, a situation that wasn’t anticipated in GST laws.

States have for long been complaining about delays in getting their assured compensation. Some states such as Kerala have been demanding the Centre borrow from the market to pay dues to states. They contend that the Centre can repay the borrowings by extending the cess imposition on items such as automobiles and tobacco beyond 2022 when these levies expire.

Bihar deputy chief minister Sushil Kumar Modi, who is the convenor of several ministerial panels within the GST Council and is regarded as the go-to person for resolving disputes within the council, said in an interview that states may make statements for political reasons but they need to be realistic about their compensation demands as the Union government is also facing revenue losses. Among the numerous decisions taken so far, the only issue on which the council had to resort to voting for settlement was taxation of lotteries due to differences among states.

Modi, who is also the convenor of the group of ministers on revenue analysis, said that the Centre can compensate states only from the revenue collected in the compensation cess fund, not from the Consolidated Fund of India. “The law does not provide that the central government will at any cost provide compensation to the states. It is to be given from the compensation cess fund. It is another thing that states may issue any kind of political statement," said Modi. He said that the options before the council for addressing the compensation requirement—increasing the tax rates and extending the coverage of the GST cess—cannot be taken up in the immediate future due to the pandemic situation.

“Let things normalize. Only then the council can think over increasing tax rates," said Modi. He also said borrowing by the Centre is not an option. “I do not think the central government can borrow. Who will repay and who will pay interest? There is no guarantee either that states’ losses will not persist for the next four or five years," said Modi.

Kerala finance minister Thomas Isaac told the council at its meeting in December, citing its former chairperson Arun Jaitley, that the council could borrow to fund the compensation requirement and extend the levy of cess from five to six years, minutes of the meeting showed. But the problem is the council is a policymaking body with no revenue stream of its own. Tax collections go to the Centre and states and not to the council.

A failure to reach a consensus on the issue may undermine Centre-state relations as GST compensation has emerged as a key element of cooperative federalism. Experts said that while the current GST compensation formula may need a relook, it could be used as a tool to aid states’ recovery. “In the current year, GST compensation can be frontloaded to aid states," said N.R. Bhanumurthy, vice-chancellor of Dr B.R. Ambedkar School of Economics in Bengaluru. Bhanumurthy said some alternative to the 14% compensation to states can be thought of without assuming a fixed rate of GDP growth although revenue buoyancy assumption can remain fixed.

Experts said taking steps to revive the economy was the best bet. “The impact of the decline in economic activities is visible in revenue collections . Since the compensation cess is levied only on certain items, there are limited options in its growth as well," said M.S. Mani, partner at Deloitte India.

Former finance secretary and chairman of the 13th finance commission Vijay Kelkar described the proposal to let the council borrow as “anomalous" in an analysis given to finance minister Nirmala Sitharaman last month. According to Kelkar, the Centre has no other way but to borrow from the market and make up for states’ GST losses even though this obligation is “overly generous".

In the previous term, the Modi administration had agreed to compensate states for the first five years for any GST shortfall from a 14% annual growth in states’ GST revenue, taking 2015-16 as the base year.

Sushil Kumar Modi said he did not see the council opting for any drastic steps during the pandemic to raise revenues. “Let things stabilize first," Modi said.

Gireesh Chandra Prasad
Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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Updated: 06 Jul 2020, 05:55 AM IST
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