Mismanaging GST

Compensation issue should have been deftly handled

It is almost certain that the Centre will have its way on the goods and services tax (GST) compensation issue because 21 states and Union Territories have backed the offer for a Rs 97,000-crore Reserve Bank of India (RBI) window. Even if the plan comes up for voting in the GST Council, the Centre’s “victory” is a near-certainty, but it will be at a considerable cost because the lack of a consensus is bound to worsen the already fragile Centre-state relations. According to estimates, the revenue is likely to fall short by Rs 3 trillion in the current fiscal year. GST compensation cess collection is likely to be about Rs 65,000 crore. This would leave a gap of Rs 2.35 trillion. In the last meeting of the Council, the Union government offered two options to the states, with the first option being a special RBI window to meet the revenue loss worth Rs 97,000 crore, which is presumably a result of GST implementation issues. States opting for this will also get relaxation in borrowing.

There are several issues here that need policy attention. For instance, the RBI window option would leave a gap and affect expenditure at a critical juncture. States are at the forefront in dealing with the Covid crisis and need funds to provide both medical facilities and support those displaced by the pandemic. In this context, it can be argued that the Council is way behind the curve and the Centre should take responsibility for this. It was clear from day one of the lockdown that GST collection will suffer. If the discussion on compensation was initiated earlier, states perhaps would have been better equipped to handle the crisis. It would have also given more time to all stakeholders to arrive at a more politically acceptable solution and avoid the unnecessary tension.

States also can’t absolve themselves of all responsibilities because quite a few of them are being unreasonable in demanding full protection of their GST revenue with 14 per cent growth year-on-year even in an extreme situation like the one caused by Covid-19, when central tax collection has dropped. The key question is: If there were no GST, would the states have got that revenue increase which they are now demanding? Indeed, are they getting 14 per cent increase in collection from the taxation rights that they retain, such as on alcohol and fuel, or stamp duties? If not, why didn’t they take a reasonable position and share some of the burden of the GST shortfall? Sticking to the letter of the “grand bargain” on GST, without recognising a force majeure situation, is being impractical.  

As things stand today, it’s obvious that the tension is unlikely to ease in the near term. The government has got the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill, 2020, passed in the Lok Sabha, which also amended the Central Goods and Services Tax Act, 2017. Accordingly, on the recommendation of the Council, the government can, by notification, extend the time limit prescribed under the Act for action that cannot be completed due to force majeure. The power to issue notification under this Section with retrospective effect can displease many states. Overall, while the Centre may have found a way to settle the compensation issue for now, the broader problem remains. The issue was indeed challenging, but it could have been handled more sensibly by both the Centre and states.