{"id":67299,"date":"2020-09-24T18:51:56","date_gmt":"2020-09-24T13:21:56","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=67299"},"modified":"2021-03-26T18:21:37","modified_gmt":"2021-03-26T12:51:37","slug":"gst-compensation-issue-analysis","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/gst-compensation-issue-analysis\/","title":{"rendered":"GST Compensation issue: analysis"},"content":{"rendered":"<h1>GST Compensation issue<\/h1>\n<p><strong><em>In News:<\/em><\/strong> Centre-state friction is growing over pending GST compensation payments issue under the <a href=\"https:\/\/forumias.com\/blog\/gst-compensation-cess\/\" target=\"_blank\" rel=\"noopener\">Goods and Services Tax (GST<\/a>).\u00a0 The Finance Minister noted that the financial crisis facing the States is a result of an \u201cact of God\u201d.<\/p>\n<h2><strong>About GST<\/strong><\/h2>\n<p><strong><em>The Goods and Services Tax<\/em><\/strong> in India is comprehensive, multi-stage, destination-based value-added indirect tax. It has replaced many central and state indirect taxes in India such as the excise duty, VAT, services tax, etc.<\/p>\n<p><strong><em>GST compensation:<\/em><\/strong> As per the GST (Compensation to States) Act, 2017, states are guaranteed compensation for revenue loss on account of implementation of GST for a transition period of five years (2017-2022).<\/p>\n<ul>\n<li>The compensation is calculated based on the difference between the current states\u2019 GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.<\/li>\n<li>Any shortfall has to be compensated from the receipts of Compensation Cess imposed on selected commodities that attract a GST of 28 percent.<\/li>\n<li>At present, the cess levied on sin and luxury goods such as tobacco and automobiles flow into the compensation fund.<\/li>\n<\/ul>\n<table width=\"100%\">\n<tbody>\n<tr>\n<td>\n<h3>The solution presented by the government on GST Compensation issue<\/h3>\n<p><strong><em>Two options presented by Centre for borrowing by States to meet the shortfall:<\/em><\/strong><\/p>\n<ul>\n<li><strong><em>Relaxing FRBM limit:<\/em><\/strong> States will be able to borrow the final instalment of 0.5% even without meeting the pre-conditions (fiscal responsibility and budget management (FRBM) act).<\/li>\n<li><strong><em>Borrow the entire projected shortfall:<\/em><\/strong> The second option is that the entire gap of \u20b92.35 lakh crore can be met by the borrowing by the States by an RBI arrangement.<\/li>\n<\/ul>\n<p><strong><em>Issues with the options:<\/em><\/strong><\/p>\n<ul>\n<li><strong><em>Inadequate compensation<\/em><\/strong>: If states opt for the first option given by the Centre, they would get \u20b92.62 trillion, including the compensation cess. That is only 87% of the shortfall.<\/li>\n<li><strong><em>Delayed payment may be a blessing in disguise for states:<\/em><\/strong> Under both the options, whatever is not borrowed by states will still be paid to them even after 2022, through an extension of the cess.<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h3><strong><em>Issues between Centre and States over GST compensation:<\/em><\/strong><\/h3>\n<ul>\n<li><strong><em>The constitutional mandate not followed<\/em><\/strong>: Centre needs to honour the constitutional promise and reimburse the shortfall in tax revenues.<\/li>\n<li><strong><em>Issues of compensation<\/em><\/strong>: As per the estimates, the States\u2019 <a href=\"https:\/\/en.wikipedia.org\/wiki\/Goods_and_Services_Tax_(India)\" target=\"_blank\" rel=\"noopener\">GST<\/a> revenue gap in 2020-21 will amount to about \u20b93 lakh crore, while cess collections are only projected to reach \u20b965,000 crore, leaving a shortfall of \u20b935 lakh crore.<\/li>\n<li><strong><em>Manufacture and sale of liquor is one of the major sources of state\u2019s revenue<\/em><\/strong>: the centre has placed restrictions on bars\/liquor sale for long time. Excise duty on alcohol accounts for around 10-15 percent of Own Tax Revenue of a majority of states.<\/li>\n<li><strong><em>Less taxation power with states<\/em><\/strong>: Using cess for agriculture such as Krishi Kalyan cess and Swachh Bharat cess, the Union is entering domains that are a part of the state list.<\/li>\n<li><strong><em>Against fiscal federalism<\/em><\/strong>: Unilateral decision by Centre without negotiation can jeopardise the future of GST, which was envisaged as a cooperative initiative.<\/li>\n<li><strong><em>Increase burden on taxpayers<\/em><\/strong>: The reliance on future compensation means that taxpayers will have to bear the cost.<\/li>\n<li><strong><em>State\u2019s opposition<\/em><\/strong>: Finance Minister of Kerala said enforcing a cut in compensation and bringing in a distinction between GST and Covid-related revenue loss is unconstitutional. The Chief Minister of Maharashtra has said that it is time to exit the GST. Punjab, Chhattisgarh and Puducherry have voiced their displeasure.<\/li>\n<li><strong><em>Stress the finances of the states\u2019<\/em><\/strong>: If compensation is not paid to states, economy of states will fail because GST accounts for almost 42% of states\u2019 own tax revenues, and tax revenues account for around 60% of states\u2019 total revenues.<\/li>\n<li><strong><em>Role of agencies in slowdown<\/em><\/strong>: During tight Monetary policy in 2017 and 2018 agencies showed higher growth than what actually obtained in 2016-17 and 2017-18. This affected structural reforms and the monetary policy of RBI.<\/li>\n<\/ul>\n<table width=\"100%\">\n<tbody>\n<tr>\n<td><strong><em>Does India need a Fiscal council<\/em><\/strong><strong>?<\/strong><\/p>\n<p><strong><em>Fiscal Council: <\/em><\/strong>It is a proposed independent fiscal institution (IFI) promoting stable and sustainable public finance. It must be composed of non-elected professionals to ensure bipartisan support.<\/p>\n<p><strong><em>Functions:<\/em><\/strong><\/p>\n<ul>\n<li>Unbiased reporting to parliament.<\/li>\n<li>Promoting accountability and transparency<\/li>\n<li><strong>Costing of budget, policies and programmes<\/strong>. This discourages populist measures and raises awareness of people about their viability<\/li>\n<li>Developing <strong>macroeconomic and budgetary projections<\/strong><\/li>\n<li><strong>Raising public awareness on budgetary constraints.<\/strong><\/li>\n<li><strong>Monitoring rules-based policies <\/strong>and this improves the quality of legislative checks on executives. Extra budgetary financing and such practices will be discouraged due to this.<\/li>\n<li>Presenting <strong>alternative policy options.<\/strong><\/li>\n<\/ul>\n<p><strong><em>Need of fiscal Council:<\/em><\/strong><\/p>\n<ul>\n<li><strong><em>Lack of transparency and accountability in existing budgeting<\/em><\/strong>: Fiscal deficit of 2019-20 as per CAG is 4.6% compared to revised estimate of 3.8%.<\/li>\n<li>Unrealistic targets of tax revenue and capital receipts.<\/li>\n<li><strong><em>Extra budgetary financing<\/em><\/strong> not shown in deficit calculations. Example, Railways financing by borrowing from IRFC (Indian Railway Finance Corporation) and Irrigation financing by borrowing from LTIF (Long term Irrigation Fund) in NABARD<\/li>\n<li><strong><em>Tax Maladministration<\/em><\/strong><strong>: <\/strong>A 2017 CAG report found that the tax department had resorted to \u2018irregular\u2019 and \u2018unwarranted\u2019 methods to meet their tax targets.<\/li>\n<li><strong><em>Coordination between GST Council and Finance Commission<\/em><\/strong>: currently there is no mechanism for such coordination.<\/li>\n<li><strong><em>To Limit the borrowings by the Central Government<\/em><\/strong><strong>: <\/strong>Article 293 provides a constitutional check over the borrowings by the State government but there is no such restriction on the Central government.<\/li>\n<li>To address these fiscal council is recommended by the <strong>13th FC (Finance Commission), 14th FC and N.K. Singh panel<\/strong> of FRBM review. 14th FC suggested such a council should report to parliament and must be autonomous.<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<ul>\n<li><strong><em>Moral obligation to compensate states from the Consolidated Fund of India<\/em><\/strong>: Centre is morally obligated to pay compensation to States as states gave away their right of taxation.<\/li>\n<\/ul>\n<p><strong><em>Way forward:<\/em><\/strong><\/p>\n<ul>\n<li><strong><em>Extend compensation period<\/em><\/strong><strong>:<\/strong> Centre can prolong the compensation period beyond July 2022 and offer a greater share of the revenues (the SGST part) to the States.<\/li>\n<li><strong><em>Address trust deficit<\/em><\/strong>: The Centre needs to deliberate with the states and bridge the alarming trust deficit.<\/li>\n<li><strong><em>Reconsider FRBM limit:<\/em><\/strong> The centre should allow the states to exceed the FRBM limit by more than 0.5 per cent of the SGDP, as a temporary relief.<\/li>\n<li><strong><em>Facilitate borrowing<\/em><\/strong> by the states without affecting their debt to GDP ratios.<\/li>\n<li><strong><em>Fiscal decentralisation<\/em><\/strong>: Of the 12% GST, 10% should be equally shared between the States and the Centre, and 2% must be earmarked exclusively for the urban and rural local bodies, which ensures some basic revenue autonomy to them.<\/li>\n<li><strong><em>Single rate GST:<\/em><\/strong> There was an original recommendation of a standard rate of 12%, to be fixed for at least a five-year period. It reduces the need to do arbitrary classification and discretion, reduces litigation and will lead to buoyancy in collection. For example; Australia\u2019s GST rate which has been constant at 10%.<\/li>\n<li><strong><em>Widen the tax base<\/em><\/strong>: GST should progressively include all goods (petroleum and alcohol) and services with very few exceptions, such as food and medicine.<\/li>\n<\/ul>\n<p><strong><em>Conclusion:<\/em><\/strong> GST is a crucial and long-term structural reform which can address the fiscal needs of the future. Therefore, there is need to strike the right and desired balance to achieve co-operative federalism which will lead to enhanced economic growth.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>GST Compensation issue In News: Centre-state friction is growing over pending GST compensation payments issue under the Goods and Services Tax (GST).\u00a0 The Finance Minister noted that the financial crisis facing the States is a result of an \u201cact of God\u201d. About GST The Goods and Services Tax in India is comprehensive, multi-stage, destination-based value-added&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/gst-compensation-issue-analysis\/\">Continue reading <span class=\"screen-reader-text\">GST Compensation issue: analysis<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130],"tags":[1576,7999],"class_list":["post-67299","post","type-post","status-publish","format-standard","hentry","category-7-pm","tag-articles_for_interview","tag-economy_issues","entry"],"jetpack_featured_media_url":"","views":{"total":362,"cached_at":""},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/67299","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=67299"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/67299\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=67299"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=67299"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=67299"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}