Raising revenues becoming a major challenge for the govt

Mohan R Lavi | Updated on May 08, 2020

While the Centre is mulling a ‘Covid Cess’, some States are clamouring for payment of their GST dues

Till now, the ways to enforce the lockdown due to a virus that refuses to go away was occupying the attention of both the Central and State governments. Recognising that the threat posed by the virus is unlikely to disappear any time soon, the governments have now begun to assess what all restrictions can be relaxed during the lockdown.

Soon, the governments’ cash balance is going to worry them and they will to have to think of raising revenues. The Central Government had formed a team to develop a policy paper that was christened ‘Fiscal Options & Response to Covid-19 Epidemic’ (FORCE).

The team had recommended levy of a ‘Covid Cess’, a super tax on the super-rich and a revival of the inheritance tax. Unfortunately, this fact was leaked, leading to the resignation of some of the team members. Yet, when the reality of dwindling tax revenues sinks in, the recommendations of FORCE may well become a reality.

Covid cess

The Central Government, however, faces a dilemma which they rather not have at this point in time. The minutes of the GST Council meetings reveal that States such as Punjab and Kerala are unrelenting in their demand for payment of all their dues a priori. If this is not done, the State governments may be forced to commence local levies which could go against the basic structure on which GST was conceptualised.

Kerala levies a flood cess to garner a few extra bucks to rebuild the State; this is not linked to GST though. The Haryana government is considering a variable ‘Covid Cess’ ranging between 2 and 20 per cent on liquor to support the areas or institutions adversely hit by the pandemic. Haryana has suffered monthly revenue losses of ₹6,000 crore due to the coronavirus-triggered lockdown.

If the Central Government does not pay up the dues soon, other State governments may also be tempted to include local levies. Soon, Maharashtra may get back to levying some sort of octroi and Karnataka may opt for a version of its erstwhile entry tax — both of which were cash cows in the pre-GST era.

GST revenues

For the financial year ended March 31, 2020, total GST revenues were ₹12,22,131 crore averaging ₹1,01,844 crore per month. The top five States in terms of generating GST revenue have been Maharashtra, Karnataka, Gujarat, Tamil Nadu and Uttar Pradesh. Prior to GST’s launch, there was a plan to levy a 1 per cent special GST in manufacturing States such as Maharashtra and Tamil Nadu. As a concept this is flawed, but it may well be revived considering that the impact of Covid-19 is such that revenue generation has become paramount.

It is clear that the only viable solution before the Government currently would be deficit financing — borrow from the international market, monetise the economy with cash and nudge banks to lend. As the experience of the RBI with TLTRO shows, banks are still reluctant to borrow from the RBI and lend to others.

This could be because bankers are wary of some borrowers who consider bank loans to be non-repayable grants. Such loans become impaired the day they are granted. Yet, there should be a tolerance limit for such impairment, which banks should consider.

The taxpayers may not protest the levy of a Covid Cess — they have seen many such in the past under an eclectic variety of names. Under GST, they would only seek a set-off of the cess paid from their output taxes. This is a fair demand because unlike other cesses which were levied for calamities or for the welfare of a particular sector, Covid-19 has hit businesses where it hurts the most — cash. A cess of 2 per cent for two years with a set-off option should be fine with most taxpayers.

The writer is a chartered accountant

Published on May 08, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like