When the GST Council missed a step

N Madhavan | Updated on December 20, 2019

The carefully nurtured spirit of true federalism has been broken and it is not good for the country

At a time when India’s polity cannot be more divided, the Goods and Service Tax (GST) — despite its imperfections — showed that political maturity and the idea of consensus is, after all, not dead in the country. Political parties set aside their ideological and other differences and worked together to usher in India’s biggest indirect tax reform. This spirit of federalism was imbibed by the GST Council, the body that governs the tax. The Council, in its 37 meetings since the tax was rolled out in 2017, took all decisions unanimously. A consensual approach ensured that concerns of all States were addressed before a decision was made.

The 38th meeting of the GST Council that was held on December 18 broke this tradition. The Council resorted to a vote for the first time. It adopted a uniform GST rate of 28 per cent for lottery, which saw 21 States voting for it while seven opposed it seeking a dual rate. The significance of this development (lack of consensus) was not lost. “Every attempt was made to keep that set tradition [of decisions by consensus] alive... but eventually the Council was reminded that rules allow [voting] and that tradition was not part of the rule book and the rules should govern the running of the Council,” Finance Minister Nirmala Sitharaman explained after the meeting.

Former Finance Minister Arun Jaitley, if he were alive today, would have been very sad. It was he who, through his skills of persuasion, built this tradition of consensus carefully. He saw to it that the GST Council acted in the true spirit of federalism. At the same time, it will be unfair to lay all the blame on the current FM too. She inherited a sharply slowing economy, something that Jaitley did not have to deal with.

Defies logic

GST, being a transactional tax, is directly impacted by the slowdown. Also, the GST Council’s decision just before the Lok Sabha polls to reduce GST rates on some goods and services from 28 per cent to 18 or 12 per cent (again Sitharaman was not part of this decision) accentuated the problem. This move, more political and less about GST rationalisation, reduced revenue collection, thus increasing the compensation outflow to the States — the trigger that led to this situation.

Sitharaman, for her part, could have handled the issue more delicately. Rather than holding back the GST compensation unilaterally, she could have worked with the States to arrive at a solution. The decision to hold back defies logic as the Centre is mandated by law (GST Compensation Act) to compensate the States if GST revenue growth is less than 14 per cent.

A compensation fund was created for the purpose with revenue from additional cess on luxury automobiles, aerated drinks and tobacco flowing into it.

The law does not have any caveat. It does not say that the compensation will be paid only if the fund has money. States could have easily taken the Centre to the Supreme Court and won. Under the circumstances, the FM should have taken the States into confidence and found a way out by either dipping into other sources to pay the compensation, raise GST rates to mobilise more revenue, thereby reducing the need for compensation, or augment the compensation fund by adding more products to it or raising the existing rate of cess.

Instead, according to Kerala Finance Minister Thomas Isaac, the idea of reworking the compensation formula was suddenly sprung at the States during the Goa GST Council meeting. This was shot down by all the States (including those ruled by the BJP), but the move sowed mistrust between the Centre and the States.

The States too over-reacted for political reasons. A delay of less than two months was blown out of proportion. They did not react this way when the UPA government delayed payment of the compensation by many years when reducing the Central Sales Tax from 4 per cent to 2 per cent in 2007 and 2008. That compensation was just a promise made by the then FM in Parliament while GST compensation is backed by an Act of the Parliament. Also, the bi-monthly payment of compensation is not enshrined in the law. It was agreed upon in a GST Council meeting.

To hold the Centre to bi-monthly schedule when there is a sharp slowdown may not cut ice in the Supreme Court.

Some States even went to the extent of claiming that salaries and developmental work have been severely impacted due delay in receipt of compensation. If they were so concerned, they could have raised taxes on petroleum and alcohol to fund the gap. Taxation of these products is still under their purview.

Seen as an entitlement

Also, the States have come to see GST compensation, that ensures 14 per cent growth in revenue, as an entitlement. This has meant that they have stepped back from their role in tax mobilisation. When there is a decline in collections, they have stopped looking at why it is so. Is it due to economic slowdown or evasion?

Taxmen at the State level have indeed become complacent. The cash crunch that the delay in GST compensation caused has re-activated the tax departments to pull-up their socks and look for possible evasion and widening of the tax base.

In India, to expect the tradition of consensus in the GST Council to continue for ever is too much to expect. But doing so would have been in national interest. Voting will mean politics of the day will drive GST Council decisions and there will always be some loser. The objective of making GST a simple and less-regressive tax will be lost in the process.

After dismantling of the Planning Commission, the GST Council is the only federal body that brings together the Centre and the States to discuss fiscal matters. It is important that finance ministers (both Centre and States) work in the Council like in a ballet, dancing hand in hand to the music. Today, they have missed a step. Let us hope it was just a small blip that will not ruin the ballet.

Published on December 19, 2019

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