More misses than hits

GST Council should have addressed pressing issues

The council that oversees goods and services tax (GST), the GST Council, met last Friday amid concern about state government finances during the second wave of the coronavirus pandemic. The Union finance ministry proposed that, once again, the Union government borrow money on the market to make up the required compensation for states, given the shortfall of revenues. The amount proposed was Rs 1.6 trillion, alongside Rs 1.1 trillion to be collected as compensation cess. But, as states pointed out, the assumptions behind this number are questionable. For one, the forecast of revenue growth of 7 per cent may not be borne out, given the second wave. Some state finance ministers were also unhappy with the 7 per cent number, which was enforced amid the pandemic last year, arguing that it should not become a precedent and replace the legally mandated 14 per cent just because there are shortfalls.

While the borrowing amount should help reduce some uncertainty for the markets, many questions remain about Union-state financial arrangements. In particular, what is the future of the compensation agreement, which was supposed to last only till July 2022, under the original GST Act? From the state governments’ point of view, the GST Act has already been bent — last year — thanks to reducing the revenue growth forecast to 7 per cent and calculating compensation on that basis. Thus, they would expect the compensation period to be extended. However, it is also true that the longer the compensation period runs, the harder it will be to make the major reforms to the GST that will make it more efficient and raise compliance — and thereby solve the revenue problem more sustainably. While on the one hand, governments should not break assurances, on the other hand, assured compensation leaves no incentive for state governments to improve compliance.

In other respects, the GST Council has not taken the tough decisions it should have. For example, it has shifted questions of the rates applicable to major Covid-related items to a Group of Ministers convened by the chief minister of Meghalaya, Conrad Sangma, which will submit a report by June 8. Shifting rates around in response to emergencies is, as the Union finance minister argued, of uncertain value to the end consumer — or patient, in this case. Any final resolution must take into account the integrity of the indirect tax system as a whole. Discussion was also unfortunately put off on complaints of an inverted duty structure for some goods, given the recent rise in commodity prices. Some exporters have complained in particular that an inverted duty structure leads to problems in getting refunds for the unutilised input tax credit. It is this process that should be streamlined — since, once again, shifting around tax rates in response to a specific temporary event, in this case the rise in global commodity prices as major manufacturers exit the pandemic, should be avoided. The larger question here once again is when the move of the GST towards simplification will begin. The pandemic may have complicated that necessary evolution of the GST, but should not be allowed to stop it permanently. The product of a GST Council that does too much on rates but not enough on reform is that state governments are already beginning to feel powerless.