The widening Centre-State rift over GST arrears threatens to derail the fiscal system

Updated on: Dec 06, 2021

The Centre should reconsider ‘conditionalities’ for the States to exceed the FRBM limit by more than 0.5 per cent of the SGDP, a move that arguably goes against the federal spirit

Thursday’s GST Council meeting has deepened the discord between the Centre and States over the issue of compensation arrears due to them — and the reasons are not far to seek. Against an estimated figure of ₹3 lakh crore due as compensation to States for falling short of the 14 per cent annual target, the Centre has apparently proposed that it give only ₹1.62 lakh crore (₹65,000 crore through the compensation cess and another ₹97,000 crore to be raised), writing off the rest as the result of an Act of God. There can be no arguing against the general principle that a 14 per cent annual increase — written into the GST Act as a compensation to the States for transiting into the new system and forgoing their revenue gathering powers — was never really on the cards this year, following the Covid-19 outbreak. But by presenting a fait accompli to the States instead of negotiating a transition to a new compensation arrangement (the GST Council’s meetings were initially based on a spirit of consensus creation), the Centre has actually jeopardised the future of the GST system. The Centre’s offer that it will ‘assist’ the States in getting loans at G-Sec rates, giving them two ‘options’ on the extent of loan that they can take, does not seem to have gone down well with some States. With the Centre being perceived as high-handed, the Chief Minister of Maharashtra, India’s most industrialised State, has said that it is perhaps time to exit the GST. Punjab, Chhattisgarh and Puducherry have voiced their displeasure. Ironically, the GST came into being as a showpiece of cooperative federalism — a product of nearly two decades of arduous negotiations between disparate political forces. It took a Constitutional Amendment to create the GST Council and a new indirect tax architecture — all in order to usher simplicity and uniformity in indirect taxes across regions. This effort should not go in vain.

With the States given a week to respond, the Centre still has time to make amends. It can prolong the compensation period beyond July 2022 and offer a greater share of the revenues (the SGST part) to the States. It is important to bear in mind that States’ finances are under stress because of Covid-related welfare commitments, while their revenues too have fallen short. While States have to bear some of the burden, the Centre cannot absolve itself of its constitutional commitment. At the same time, any undue extension of the cess mechanism is tantamount to imposing an additional tax, which will not help revive economic activity.

Above all, the Centre needs to invest time and energy in ‘statecraft’ — in reaching across to States and bridging an alarming trust deficit. It should reconsider ‘conditionalities’ for the States to exceed the FRBM limit by more than 0.5 per cent of the SGDP, a move that arguably goes against the federal spirit. The GST Council should arrest the imminent slide into chaos in these unprecedented times.

Published on August 27, 2020
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