When the Goods and Services Tax (GST), the biggest tax reform in independent India, was rolled out two years ago, it was hailed as a celebration of the federal spirit and the success of consensus politics. And, rightly so. It had taken 17 long years of arduous efforts to make the GST a reality. However, going by the cavalier attitude of the NDA government towards the concerns of the States, it now appears that the new regime is faltering. Instead of addressing the implementation issues in an impartial manner, the Centre has chosen to shy away from its responsibility of paying the GST compensation to the States, citing the coronavirus pandemic as an ‘act of God’. Adding insult to the injury, it has asked the States to fend for themselves by seeking market borrowings or loans from the Reserve Bank of India. This is totally unfair and seriously undermines the federal spirit, which guides the GST law. The Centre has no other option but to pay full GST compensation to the States as promised. One wonders why the Centre cannot borrow from the market by relaxing the provisions of the Fiscal Responsibility and Budget Management (FRBM) Act and fulfil the promise of paying the compensation instead of asking the States to do so. While the borrowing limit for the States under the FRBM norms is 3%, it is 5% for the Centre, and it can increase the limit if it wants while the States need Union government’s permission for it.
It is also unjustified on the part of the Centre to reduce the quantum of GST compensation to be paid to the States from Rs 3 lakh crore to Rs 1.65 lakh crore. States like Telangana would be entirely within their rights to take legal recourse if the Union government refuses to take full responsibility to uphold the GST Act. Telangana has lost about Rs 8,000 crore, amounting to nearly 35% of the income, during the past four months on account of the coronavirus-induced lockdown. The State would have additionally earned Rs 25,000 crore had it not joined the GST regime. As part of the new tax regime, the State had paid Rs 18,032 crore to the Centre while it received only Rs 3,200 crore. Telangana has now taken the lead in mobilising support from other States for the just cause and mounting pressure on the Centre to honour its legal and moral commitments. The denial of compensation amounts to a double whammy for the States— a sudden increase in expenditure due to the public health crisis even as revenue flow has dwindled. The Centre is morally bound to compensate as the States are bearing the brunt of the pandemic.
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