The Union government could bring all the States under the roof of Goods and Services Tax (GST), convincing them of the importance of ‘One-Nation-One-Tax’, the urgent need to simplify the federal tax structure and, at the same time, assuring them, with legislative backing, that the Union will make good the loss of revenue emanating from its implementation. The States, relying only on the latter part of the above syntax, agreed for GST. So, any deviation from the promise by the Union would cripple the federal structure and jeopardise the Centre-State relations, apart from affecting the credibility of the GST Council.
The GST (Compensation to States) Act, 2017, gives every bit of detail, be it relating to growth rate of revenue (section 3) or calculation of revenue (section 6) or release of compensation (section 7) or levy and collection of cess (section 8) and mandates the Union to make good for States for a period of five years, ie, up to 2022 or such period as recommended by the Council, meaning thereby if the Council recommends – now it is the demand of many States – for extending the period of compensation, the Union government is bound to compensate the States beyond 2022.
Arun Jaitley, while replying to the debate on GST Compensation Bill, in Parliament had rightly said, ‘…States have pooled in their sovereignty to the GST Council, the Centre has pooled in its sovereignty to the GST Council. So, the GST Council is India’s first federal institution where sovereignty of the Centre and States……pooled together in a federal institution…….It is incumbent on all of us to make sure that the federal institution works. Therefore, in order to make this federal institution work, the delicate balance between what the Centre and States have unanimously agreed is to be maintained…” He further says – “…it is a federal contract…”
Not only this, Clause 18 of the Constitution (101st) Amendment Act, 2016, clearly says Parliament shall provide for compensation to the States for loss of revenue arising on account of implementation of the GST for a period of five years.
So, it is not only a contract between the Union and the States, but it is also a mandate given by the Constitution to the government of India and any deviation from this ‘contract’ is tantamount to a criminal breach of trust. This clearly demonstrates that the sovereign power at the Union is obligated to compensate and the States receive compensation without any liability. So, taking shelter under ‘economic slowdown’ or ‘pandemic’ or ‘an act of God’ to shirk the responsibility is unjustified.
Burden on States
The Finance Minister is on record asking States to borrow from the market and has given two options. But, how crippling economies of the States can borrow from the market? The contention of the Finance Ministry is that, if it borrows from the market, the rates would go up and borrowing costs for the States and private sector will go up. This is not a justified alibi. It appears from the statement that the Finance Ministry appears to be focusing more on maintaining fiscal deficit rather than pulling the country out of this unprecedented crisis. So, due to the ‘act of God’ how can States be in a position to handle this huge additional burden of Rs 2.35 lakh crore this year, if one includes the health costs of the impact of Covid-19? Even if they do so, the rate of interest would be higher when compared with the rate at which the government of India can manage.
Secondly, the government of India set the disinvestment target of Rs 1.2 lakh crore in 2020-21 and will be able to pool resources, but the States do not have that elbow room. Thirdly, the States cannot borrow from abroad nor can they share profits from the RBI. And, even if they borrow, different States will have to pay different rates of interest, which is again a burden on States.
The government, taking shelter under Covid, has even gone to the extent of an additional incentive of 0.5% relaxation in the FRBM limit during the current year. But, there are conditions put under the Atmanirbhar Bharat package and the States have to fulfil those conditions, and only then they will be allowed additional relaxation. But, there are reports that this 0.5% would be without any conditions which needs to be clarified. Also, if one avails this 0.5% limit, then the States are mortgaging their future borrowings for the present.
While one may argue that the present situation is the outcome of Covid and it has delayed the payment of compensation, it is far from reality as the compensation was delayed in August-September last year and since then at no point, the Finance Ministry has released compensation on time. Compensation payment is pending for States since April 2020, in the current financial year. The Union government is yet to pay compensation for the last six months. How can the States survive with twin shocks – Covid impact on the economy and non-payment of GST compensation by the government?
Suggestions to pool resources
• Centre should not shy away from increasing the fiscal deficit or worry about international ratings as the whole world is experiencing the pandemic. This would bring in improved relations with the States as they will drive the growth
• To compensate for the present shortfall in GST, cess on sin goods can be extended beyond 2022
• Increase and hasten up disinvestment target
• Explore tax rates on certain items or bring in more items under 28% slab like the recent increase in levy on petroleum products
Younger States like Telangana, which are driving the engines of growth and are preferred destination for pharma and IT, need heavy capex, apart from its committed capex on irrigation and rural development. In the absence of its legitimate share from the Centre, this will derail their development.
Hence the need of the hour is to strengthen the Centre-State relations and ensure that the Members of Parliament get to espouse their cause both in the House and outside the House.
(The author is Member of Lok Sabha from Chevella, Telangana)
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