GST payment to states a must to 'stimulate' demand amidst pandemic, recession

By Dr Arjun Kumar. Dated: 9/19/2020 11:41:34 PM

Since 2017, India has been governed by a single tax regime with the introduction of Goods and Services Tax (GST) after almost two decades of deliberations and hard work. It has facilitated the unification of the Indian market by allowing free movement of goods and services across the state borders which, earlier, acted as the major barriers in such mobility.
The multiple tax rate slabs for different categories of product, processes glitches and inadequate IT infrastructure, exclusion of alcohol, electricity, real estate, petroleum, and slowing down of the growth rate has made this system more complicated overtime.
GST system has found itself in a very awful situation following the Covid-19 pandemic and ensuing economic downturn prevailing in India. The states have now started to claim their share of compensation from the Union government which, albeit surprisingly, has expressed its inability to pay the compensation to states due to the revenue foregone and current financial constraints. Government of Kerala has even defined this denial as “betrayal of trust”.
The impending GST compensation to state governments needs to made available sooner for effectively stimulate aggregate demand, in the spirit of the cooperative and fiscal federalism, especially during the pandemic and recession. Further delays would not minimise the collateral losses and only make the situation worse for the economy and GST system, getting to a situation which can be called – too late too little.
The current GST conundrum, pandemic and recession, clearly is more than a short term and rather medium-term challenge. To overcome this situation, coordinated efforts of centre and state governments in federal system are necessary. Nonetheless, sufficient ingredients need to be instil trust and confidence among each other towards realising the vision of $ 5 trillion economy, New India, and #AtmaNirbharBharat.
With this background, the Impact and Policy Research Institute (IMPRI), New Delhi, organized a webinar and panel discussion, “GST Conundrum: State of India's Indirect Taxation System in the Times of COVID-19 Pandemic and Recession”, on September 11, 2020.
Atul Sarma, Distinguished Professor, Council for Social Development (CSD), New Delhi said that taxation system before GST was not efficient because of multiple nature of taxes coupled with different slabs that dented the revenue earning potentials of the states and thereby, hindering the development of Indian economy.
GST, as an alternative tax regime, has featured in policy discussion since 1950s. A taskforce established in 2003 headed by Prof Vijay Kelkar and the Union Budget of 2006 proposed a GST. After prolonged and in-depth deliberations with the state governments, the Government of India finally introduced the GST or the One Nation One Tax, on July 1, 2017.
In the process of consultation of states, there was an amendment to compensate the states to the extent of shortfall over the 15% of overall tax through the cess to be levied on sin goods. But the compensation mechanism has not yielded an adequate amount of tax proceeds. The maximum amount that can be processed is about Rs 90,000 crore, whereas, the requirement stands at Rs 2.35 lakh crore. The Union government has subsequently suggested two alternatives to states which is being faced with opposition by states.
Prof Sharma expressed his concern for the fiscal health of the Union government in the wake of Covid-19 and attendant unwillingness of the government in compensating the states from the Consolidated Fund of India. He opined that GST was pushed hurriedly with very little attention being accorded to building IT infrastructure necessary for GST implementation.
Prof Rajeev Gowda, ex- member of Parliament, eminent academician, public intellectual and politician, asserted that the then finance minister Arun Jaitley projected 14% increase in tax revenues every year with the implementation of GST, which Prof Gowda said was a very unrealistic assumption.
He noted two crucial aspects: First of all, there was a surplus in the collection of taxes because the cess was levied on demerit goods and the Union government absorbed this surplus into its own resources. And secondly, when states raised their concern of any future shortfall of tax collections, then the Union government ensured them of due compensation.
But the Union government’s recent announcement regarding their inability to compensate is clearly antithetical to the constitutional amendment of GST Compensation Act, Prof Gowda said, adding, states are at forefront in fighting Covid-19, but they have not been allocated enough resources, not even the constitutionally mandated compensation on account of shortfall in tax revenue.
So, states are essentially left with two options – either to cut capital expenditure or to borrow. In case of borrowings, the state will have indirect sovereign guarantee on their loans unlike the center having better capacity to borrow at lower rates as well as repay their loans, he asserted.
According to Prof Gowda, one possibility could be to borrow in one tranche and then allot the same among the states according to the Finance Commission formulae. The Union government could also raise loans from multilateral institutions. But the response by the Central government to the states' losses demean the ethos of federalism. The states may now start introducing emergency surcharges to raise resources. They may also borrow and pay off debts over a course of time.
R Kavita Rao, director (acting) and professor, National Institute of Public Finance and Policy (NIPFP), New Delhii, said that initially the compensation package was designed in a generous manner to encourage states to accept the new tax regime for first five years. Thereafter, the issue of stabilisation of GST system and revenue neutral system was expected to be tackled between centre and states. However, the current pandemic has brought the parties to face a very tough reality.
The Union government underwrites the potential losses since resources can be raised from anywhere to meet the shortfall. Recent financial downturn reduces the revenue of the governments, and, at the same time, increases the compensation requirements of the state governments. One way to meet the revenue shortfall is to increase the cess rate which could, however, be ineffective during economic crisis, Prof Rao said.
TK Arun, editor, “The Economic Times”, said that any compensation mechanism involves injury, an injured party and the party responsible for providing compensation. In the present case, the Union government expects the state governments – the injured party – to compensate themselves. This situation is becoming a repentance for states for accepting the GST regime.
By forcing state governments to borrow to meet their revenue shortfall would effectively increase the burden on the economy in coming years as they will get trapped in the debt spiral. Moreover, the tax to GDP ratio is lower than 16% and after the introduction of GST, the proportion of indirect taxes on GDP has remained unchanged (around 9% of GDP), which means tax burden has never gone up or gone down, though the tax collections should have been increased, Arun said.
He stated, many products such as petroleum, tobacco, alcohol, power which are major revenue earners are left out of the GST tax slab. Revenue potentials of GST could be enhanced by bringing all these products into the GST network, and undertaking complete tax audit trial for efficacy in overall tax collection, regime and public finance. It would then be easier to catch hold of the tax evaders. Rigorous audit trail under GST needs to be supplemented with requisite economic analysis, harnessing digital technology like big data analytics, AI.
Dr Suranjali Tandon, assistant professor, NIPFP, New Delhi said that the recent GDP numbers have shown contraction of almost 24% with severe negative impact on tax collections. Among the sectors, real estate and construction has been hit hard followed by the manufacturing sector. Only the agricultural sector has experienced positive growth of 3.5%. This implies that GST burden will be carried out by certain sectors.
*Director, IMPRI and China-India Visiting Scholar Fellow, Ashoka University

 

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