GST shortfall and retaining trust

The heads I win, tails you lose approach will damage the assiduously built federal system

By Author KT Jagannathan   |   Published: 12th Sep 2020   12:05 am Updated: 11th Sep 2020   11:54 pm

The downhill ride had started much before. The fall, however, has accelerated rapidly following the outbreak of the deadly virus. The coronavirus and the prolonged lockdown in its wake seem to have knocked the bottom out of the Indian economy. So much so, the economy witnessed the steepest fall with the country’s GDP (gross domestic product) contracting by a whopping 23.9% in the first quarter of this financial year (2020-21). India began publishing quarterly figures in 1996. And, this is by far the sharpest contraction yet in GDP since then.

Data released by the National Statistical Office showed that manufacturing, construction and trade sectors contracted by a massive 39.3%, 50.3%, 47%, respectively. The only silver lining was the performance of the farm sector which grew 3.4% in the June quarter. Significantly enough, the government expenditure as represented by the public administration services also contracted 10.3% in the first quarter.

Sharing the Pain

The fall in GDP number is alarming. The pain of its impact is visible across layers without any bias. As the country is still struggling to exit the lockdown, the rising cases of the virus have virtually pushed people to the edge. With the economy hurtling down to a newer depth, the Centre-States relationship, too, has hit a new flashpoint.

How to share the pain? The pain is caused by a steep fall in GST (goods and services tax) collection. The Centre has projected a shortfall of Rs 2.35 lakh crore in GST mop-up. However, it contended that the deficit due to the implementation of the GST is only to the tune of Rs 97,000 crore. The rest, in its view, is caused by “an act of God” (read Covid-19). Clearly, the Centre has sought to drive home the point that a substantial part of the shortfall in GST collection has nothing to do with the GST and falls outside the purview of its implementation.

When the GST architecture was created, a provision was inserted in the law that allowed compensation to the States for loss of revenue arising out of its implementation. Under this, any shortfall in revenue due to transition to the GST regime is to be made good from a pooled GST Compensation Fund for a period of five years (which will end in 2022). The corpus for the fund is sought to be raised through a compensation cess on “demerit goods”. Former Finance Minister Arun Jaitley was the prime architect of the GST. He managed to bring all the States on board to accept a single national indirect tax regime. His decision to guarantee the States revenue growth of 14% a year in a way clinched the GST deal. This largely induced the States to give up their fiscal autonomy and adopt the GST framework.

But none would have anticipated the extraordinary happening of the kind the country is experiencing at the moment. The invisible virus of the unknown kind has turned everything topsy-turvy. The GST architecture appears to have developed cracks in its wake.

Desperate Situation

Finance Minister Nirmala Sitharaman has made a distinction between revenue shortfall due to the GST implementation and the one caused by the act of God. In a sense, it is tantamount to invoking the force majeure clause (as in a commercial contract), which virtually allows one to get away from any guarantee in the event of a natural disaster.

With collections plummeting in the wake of a shrinking economy, the situation is turning out to be desperate. In a bid to tide over the mess, the Centre has proposed a couple of options. It wants the States to directly borrow Rs 97,000 crore. And, it has promised to facilitate a special window to borrow from the Reserve Bank of India. This is a shortfall due to the GST implementation.

The Centre, it is clarified, will help keep the interest cost on these borrowings close to the yield on the government of India bonds. Should the cost be higher, it has promised to bear at least a part of the additional interest cost. The repayment of interest and principal will be made from the compensation fund. And, it has promised to extend the period of cess collection beyond 2022. As a second option, the Centre has proposed the States to borrow the full shortfall (including the Covid-triggered ones) of Rs 2.35 crore at perhaps higher cost. In this instance, the interest cost will be borne by the States and the principal will be serviced from the compensation fund.

GST shortfall

Fiscal Maths

GST as a single national tax came into existence after several rounds of discussions and debate. When it did finally happen, it took away the fiscal autonomy of the States. All of a sudden, the States are told to fend for themselves. This is a completely new situation. And, this is bound to severely test the Centre-States relationship. The Centre is concerned that its fiscal maths could go for a toss if the borrowing is done by itself. This will have a multiplier implication. The sovereign rating could come under stress in that case which will have a negative impact on the interest rates.

Nevertheless, the GST row is getting shriller with lots of political overtones. The situation, no doubt, calls for a relook at the GST architecture and find a mutually acceptable mechanism to take care of an event of this entirely unanticipated kind that the country is experiencing today.

Words matter in good and bad times. A promise is a promise. Bad times can’t be the reason to break a promise and dishonour a word. Any legitimate political pact between the Centre and States must be capable of surviving the test of time. The heads I win, tails you lose approach will damage the assiduously built federal system that has acquired iconic status in the eyes of the global community in the wake of the GST pact.

Trust is the fulcrum around which any relationship is built. When deficit creeps into this trust, it develops an avoidable rupture in the relationship. That could trigger a permanent mistrust with attendant unhealthy consequences. The Centre will do well to keep this aspect in mind while dealing with emerging environment financial issues arising out of the pandemic-induced lockdown.

No doubt, the GST Council has to take a decision on the solution to the imbroglio. Yet, it is no secret that the Centre has the power to push its views. These are not normal times. Surely, times like these call for a generous approach and some out-of-the-ordinary solution. Indeed, the Centre has a lead responsibility in limiting the larger damage to the economy. Nevertheless, the situation demands an accommodative attitude from all stakeholders. The trust must be kept intact somehow.

(The author is a senior financial journalist from Chennai)

Now you can get handpicked stories from Telangana Today on Telegram everyday. Click the link to subscribe.

Click to follow Telangana Today Facebook page and Twitter .