Editorial: Centre’s gain, States’ loss
As the Goods and Services Tax (GST) regime completes five years this month, a closer look at the implementation challenges makes it clear that the States are losing out a lot in the bargain. At the time of the rollout in 2017, the GST was considered a prelude to the countrywide integrated market but in […]
As the Goods and Services Tax (GST) regime completes five years this month, a closer look at the implementation challenges makes it clear that the States are losing out a lot in the bargain. At the time of the rollout in 2017, the GST was considered a prelude to the countrywide integrated market but in practice, the new tax system appears to have gone astray. There is growing frustration among the States over foregoing their powers to tax to raise revenue. The reality is that the States spend about 60% of the combined expenditures of the Indian Union, but have command over only 40% of combined revenues. The GST regime has meant gains for the Centre and loss for the States. A radical overhaul of the taxation system may be needed to save it from contradictions that undermine federalism. At present, there is widespread discontent with not just the way GST has been implemented but also in the way it has impacted various stakeholders. The NDA government had guaranteed a 14% year-on-year increase in GST revenue to all State governments from July 2017 to June 2022. The guarantee was given to convince the States that they will not lose revenue due to the implementation of the new tax regime. The lure of a handsome compensation also convinced many States that were apprehensive about surrendering their federal power of taxation to the Centre. However, after the first two years of implementing the GST, the Centre started struggling to keep its promise of compensating the States.
While the States want the extension of the GST compensation period by another five years, the Centre fears that it will distort the entire structure and render it useless. Two important aspects of the GST design have had a bearing on States’ revenues. First, the subsuming of excise duties within the GST meant that the Centre was surrendering a tax that had a much narrower base, compared with States which had sacrificed sales taxes, which had a much wider tax base because they were levied on final consumption. As a result, the GST, by design, demanded far more from the States than from the Centre. In India, the authority to levy taxes on final sales at the consuming end was, by constitutional design, vested with the States. Prior to the GST, the taxes on sales contributed almost two-thirds to the States’ own tax revenue. The grand bargain that facilitated the advent of the GST, which is reflected in the decision to compensate the States for losses for five years, acknowledged the sacrifice that the States were required to make. Keeping in view the pandemic-induced revenue losses, the Centre must extend the GST compensation to the States by another five years.
