How will the Centre ensure States’ finances are not hurt?

How will the Centre ensure States’ finances are not hurt?

Context

• Right from its initiation, it was perceived that implementation of the Goods and Services Tax will not go in favor of States in terms of finance
• Reaching at a consensus with regard to the compensation the Centre would have to pay States for any losses they might incur due to the implementation of the new indirect tax regime, was a huge point of conflict

What is the Issue?

• The GST is a destination-based tax, and as such is viewed as being to the advantage of the consuming States and to the detriment of the producing States
• The producing States like Maharashtra, Tamilanadu, Gujrat, Haryana and Karnataka had raised objections to the implementation of GST, forcing the Centre to agree to a formula for compensating them in the event of a loss of revenue.

What has been Done ?

• The 14th Finance Commission advised the Centre to provide 100% compensation to States for their revenue loss after implementation of GST for the first three years.
• The fourth year would bring 75% compensation, and the fifth year 50% compensation.

Further Conflict

• The advise put forward by the Commission did not pacify the States who demanded full compensation for five years.

Issue Resolved

• The Centre agreed to this demand in December 2016, settling one of the most contentious issues delaying GST.

What were the Issues with this Compensation?

• A huge problem that arised in front of the Centre was – how it was going to finance this compensation package, which experts estimated could be as much as Rs. 55,000 crore.
• The GST, once implemented, will subsume almost all the cesses levied at the moment, including Swachh Bharat Cess and Krishi Kalyan Cess.
• Other cesses like the education cess on imported goods and the cess on crude oil will remain under GST.

Way Out as decided by the Govt.

• The government needs extra revenue to compensate the States, and so the GST Council decided to impose additional cesses for five years on certain goods over and above the highest tax bracket of 28%.
• These additional cesses, however, will be removed after five years