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News: On 1st July 2022, India’s goods and services tax (GST) will be five years old. Further, the GST Council will be meeting over the next few days.
What are the issues with GST?
(1) The breakdown of trust and cooperative federalism between states and the Union government,
(2) The expiry of the revenue guarantee that protected states’ revenues. The state governments were given five-year insurance from the Centre of a minimum revenue guarantee. However, the GST failed to live up to its economic promises to states.
In the past, the Union government levied and appropriated cess revenues for itself without sharing them with the states.
The center is reluctant to provide compensation because of its deteriorating fiscal situation, foisted by high global crude oil prices, rising fertilizer imports, and expanding welfare expenditure.
(3) Recently, the Supreme Court awarded its judgment highlighting that the GST Council’s recommendations are not binding on the states. The states can comply fully with the Council’s recommendations or modify them as they deem necessary.
(4) Democratically elected state governments in India do not have sole powers for both direct and indirect taxation. This is in very contrast to the rest of the federal democracy. GST centralized India’s indirect taxation.
(5) The GST regime has witnessed flawed implementation. There has been GST’s economic failure
(6) The SC’s judgment has opened the window for states to override the fundamental GST premise of a “one nation one tax”. If pushed to a corner, states may now use the SC ruling as a shield.
The Way Forward
The cooperation between states and the Union cannot just be an economic compact. It should be a broader political ethic.
Recently, the SC observed that it is in the national interest to have both cooperative and competitive federalism.
In the larger and longer-term interest of GST, it is prudent to extend the compensation guarantee. All the state governments want an extension of the compensation guarantee. The focus should be on the GST revenues buoyancy rather than on eroding the states’ confidence.
To address trust deficit and revenues issues, there is a need for rationalization of rates and ease of GST compliance. The Union government should commit to the states that it will not resort to cesses and surcharges that are outside the shareable pool of revenues.
The union government must resolve to honor the revenue guarantee commitment to the states. It must respect and uphold the true spirit of fiscal federalism, as well as political and constitutional federalism.
Now, the government should move towards decentralization by giving states powers for direct taxation.
Source: The post is based on the article “One GST, the problem is trust deficit” published in the Indian Express on 27th June 2022.
