Five years of GST: How Centre-state bickering on the tax’s pickings can be resolved – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/five-years-of-gst-how-centre-state-bickering-on-the-taxs-pickings-can-be-resolved/articleshow/92581899.cms

Synopsis

To be sure, the Union government, too, is fiscally challenged, having had to undertake a huge step-up in its social welfare spending, including the provision of free food grains for 800 million people for the last two years, to mitigate the impact of the Covid-19 pandemic. And, hence, the Centre is not inclined to extend the compensation package.

Today, India observes the fifth anniversary of the goods and services tax (GST) – the marquee indirect tax reform, which, among other things, for the first time economically unified India under the umbrella ideology of ‘One Nation, One Tax’.

Normally, this would be a moment of celebration given that this very important piece of economic reform was presaged on a rare bipartisan consensus. Unfortunately, the anniversary brings with it a great sense of uncertainty, especially with the trust quotient between the central government and states plumbing new lows.

More Taxing if Outsourced
The states are on the edge as, starting today, they will no longer be entitled to compensation if GST collections fell below the assured growth of 14%. The compensation package was part of a grand bargain to get states to pool their sovereignties – giving up their right to tax – to enable ‘One Nation, One Tax’.

The bitter experience during the pandemic, when collections crashed with the economy going into a lockdown, must be fresh in their minds. Yes, GST collections are up. In May, the receipts were ₹1,40,885 crore, 44% higher than the same period last year. But growing global uncertainties and surging retail inflation suggest that another economic shock may be around the corner.

To be sure, the Union government, too, is fiscally challenged, having had to undertake a huge step-up in its social welfare spending, including the provision of free food grains for 800 million people for the last two years, to mitigate the impact of the Covid-19 pandemic. And, hence, the Centre is not inclined to extend the compensation package.

On the face of it, this seems to be some kind of a deadlock. It can’t be left unresolved as it risks forcing a deep wedge between the Centre and states. Given that the much-needed next generation of reforms need the federation to think in unity, it makes sense to expend social capital to resolve the problem.

Indeed, another grand bargain is par for the course. The first phase was to enable the transition. Even though the GST structure is still a work-in-progress, it is safe to conclude that the central government and states should be happy with their effort. In fact, both sides have been putting off taking tough decisions to fix the challenges in the GST structure – especially with respect to multiplicity of rates and the fact that petroleum products and alcohol, both of which are major sources of revenue, are presently outside the purview of the GST.

The strained relations notwithstanding, the Centre and states, for inspiration, can lean on the report of the Task Force on Implementation of the Fiscal Responsibility and Budget Management (FRBM) Act headed by former finance secretary and chairman of the 13th Finance Commission Vijay Kelkar.

The report examined the problem with the prevailing system of indirect taxation of goods and services. It found that not only was the structure fragmented – since it was based on the jurisdiction of both the central and state governments – but also services, which accounted for almost half of the country’s GDP, were not taxed appropriately.

As a solution, the Kelkar task force proposed a new destination-based value-added tax (VAT) on all goods and services. The structure of the proposed GST avoided the cascading effect by ensuring that the tax at each stage is a pass-through and tax incidence fell on the final point of consumption.

Diving in the Common Pool
It then went on to propose what it called the ‘grand bargain’ – the states, too, would have the power to tax all services. And that both states and the Union government would exercise concurrent yet independent jurisdiction over common tax bases extending to all goods and services. The architecture and the means provided by the tax force cleared the way for the pooling of sovereignties, enabling the adoption of the GST.

The negotiating principles laid down by the Kelkar task force also defined the compensation package offered by the NDA to enable GST. A similar sweetener can be considered to ensure consensus ahead of the rollout of the next phase of GST. With revenue collections having clearly stabilised, the stage is set for both sides to explore transitioning to the next phase of GST.

Both sides could explore a compromise by first acknowledging that there is no magic fiscal stick to make the current problems go away. While GST revenues may have stabilised, unplanned economic shocks are now a reality. Given the back-to-back economic shocks – first triggered by the once-in-a-century pandemic and more recently by the Russia-Ukraine conflict – the GST Council, the apex body shepherding the indirect tax reform, may well consider creating a crisis fund to deal with the unknown-unknowns.

Something similar to how the council had permitted Kerala to levy a special cess to raise revenues to deal with the fallout of the devastating state-wide floods. In return for this new fiscal cushion, the states can agree to both petroleum and alcohol being included in the GST pool. A win-win for all.

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