Every time it fails- yet Indians love to imagine that centralization is the solution to the country’s problems. It happened with Nehru’s Planning Commission Committee, which went from an advisory body to one that allowed central to dictate to all states.
Now, Modi’s goods and services tax is happening. “One country, one tax” aimed at simplifying the federal tax structure in India is now so complicated that some exasperated politicians are talking about returning to the old system again.
The GST with high fixed compensation was launched in July 2017 and almost covers all indirect taxes collected by states and the Union. In order to persuade states to adopt the new regime, the Central government promised to make up for five years of tax revenue deficits through a new goods and services tax (GST) compensation cess.
To understand why the stand of the central government is so complicated, we need to go back to why the concept of compensation was introduced in the first place.
In theory, the goods and services tax will generate as much revenue as the previous tax system. However, the new system means that consumption rather than manufacturing will be the focus of taxation-which means that manufacturing states will lose out. However, Tamil Nadu vociferously opposes the idea of a goods and services tax.
It was to appease these states that the idea of compensation was mooted. In order to keep this commitment watertight, the idea of compensation was written into the “Constitution” and passed by the central legislation.
Assuming that on the basis of 2015-16 state tax revenue, state revenue will increase by 14% year-on-year. Any difference between this projection and the actual GST revenue is compensation.
This would be underwritten by means of special compensation cess, levied over the Goods and Services Tax on sin (for example, tobacco) or luxury goods (for example, SUVs).
The predicted growth rate of consumption tax revenue was fixed, not linked to economic growth.
National income would be increased by 14% is absurd even then. For example, the GDP growth rates in 2015-16 and 2016-17 were far below this figure, respectively, 10.5% and 11.8%. Since then, the situation has gotten worse, with an increase of 4.2% in the 2019-20 fiscal year, and due to Covid-19, the GDP is expected to shrink significantly this fiscal year.
GST Serves Dual Purpose
Although it is called “compensation”, it actually serves a dual purpose: it was so generous that it encouraged all states to accept GST like incentives as a new beneficial regime.
In 2017, the Central Government played its game very well by offering high- fixed compensation to all states. But 2020 year revealed the central government’s real face.
In the three years since the Goods and Services Tax (GST) regime was grandly launched in 2017, the government admitted for the first time that it has no money to pay its share of GST revenues to the state governments in accordance with the GST law.
Last month, Finance Secretary Ajay Bhushan Pandey told a parliamentary panel that the central government will not be able to pay the 14% promised goods and services tax compensation to the states due to low tax collection.
In the worst times, when states need the most help from the Central government, it said it has no money to pay 14% promised GST compensation but it has solutions include offering loan schemes, raising taxes on some items, or bringing exempted items under the tax net.
Central Government Evading Its Responsibility
Due to an unplanned lockdown imposed by the Modi government Indian economy has collapsed badly. Thus, in the 2020-21 fiscal year, the gap between the projected tax revenues and GST collections for all states is staggering: 31 trillion rupees. In contrast, the goods and services tax compensation cess aimed at bridging this gap is expected to generate only 65 billion rupees. This leaves the states short of 23.5 crore rupees.
Nirmala Sitaram, the finance minister, called it an “act of God” and said GST was not responsible for the huge shortfall.
This does not seem to be a fact, but more excuses. In 2019, a few months before the first coronavirus case, the situation was clearly revealed that the compensation would fall short.
The Modi government has not stepped up its efforts to fill this gap but has washed its hands off the matter.
Last month, as part of the Goods and Services Tax Council meeting, the Union recommended that states should borrow from the Reserve Bank of India to bridge the gap.
It shows how the central government can rob state governments by offering loan options in the name of compensation.
At the 41st meeting of the Goods and Services Tax Council, the federal government provided states with an option to borrow from the Reserve Bank of India based on future compensation requirements.
The Centre has distinguished between what is payable to states as compensation due to implementation of the indirect tax reforms, rolled out in 2017, and the revenue loss on account of the COVID-19 pandemic.
In the loan options statement distributed to all states, it promised to pay compensation by giving states two lending options:
The first option is that states can borrow Rs 97000 crore, with FRBM relaxes by 0.5%, while the second option proposes to borrow Rs 2.35 lakh crore to cover all emergency funding deficits.
States ruled by non-BJP governments have rightly rejected the federal government’s offer that mandates all state governments to borrow to address revenue shortages.
Therefore, On Monday, the central government offers a special interest-free 50-year loan of 12 billion rupees to the states.
In addition to this, on Monday, Finance Minister Nirmala Sitharaman introduced several proposals to boost consumer spending demand in the economy hit by the coronavirus pandemic.
The scheme is divided into two parts: Leave Travel Concession (LTC) voucher and special festival advance scheme.
Sitaraman said the plan is valid until March 31, 2021. She said that the government will incur 5675 billion rupees on this. She said that on a conservative basis, we expect the LTC cash voucher scheme to generate additional consumer demand of 28 billion rupees.
Besides this, the central government has decided to issue a special interest-free 50-year loan of 12 billion rupees to the states in three parts.
- In the first part, Rs. 2,500 crore will go to the 8th north-eastern states, as well as Himachal Pradesh and Uttarakhand.
- In the second part, according to the 15th Financial Commission, the remaining Rs 7,500 crore will be allocated to other states. Initially, half of the sum will be given, and the remaining half will be given at the utilization of the first 50%.
- Sitharaman added that in the third part, Rs 2000 crore for states to meet at least three of the four reforms proposed in the Aatma Nirbhar fiscal deficit package.
- The central government has estimated that the measures announced on Monday, to enhance consumer spending and capital expenditures may boost demand by Rs 73,000 crore, which will be spent before March 31, 2021.
There are two main reasons behind the central government’s 50-year interest-free loan special scheme:
- Finance Minister’s proposal comes hours before the third round of the GST Council conference over the issue of compensating states for the Rs2.35 lakh crore shortfall in their share of the revenue from the indirect tax this fiscal year.
- It means that to close the matter temporarily, the central government offers this scheme.
- The second reason is it may have the money it did not have when it provided compensation to the states, and it now uses this money to cover future fiscal deficits due to interest-free schemes.
This special 50-year interest-free loan of Rs 12,000 crore means that states can now avail of Rs 12,000 crore without paying any interest.
This special free interest-based loan scheme seems great, but be aware! This is not a good plan and doesn’t fall into the trap of the government.
Earlier, the Minister of Finance had explicitly stated that Central has no money to pay compensation, so now, how can the government suddenly makes its mind to give interest-free loans that directly affect its financial deficit?
Let us give an example to better understand this matter:
Suppose, you work in an organization. While paying your salary, the organization says it has no money to pay your salary, but can it provide you with financial help through a loan? Isn’t absurd??
As we all know, the central government, however, unwilling to take the right measures given that its own financial situation is extremely precarious with proposals such as demonetization, lockdown due to coronavirus, and, ironically, the goods and services tax (GST) itself, taking the wind out of the Indian economy’s sails.
Moreover, this is the fact that India is heading towards a protracted economic downturn, which means that tax collection will be weak, regardless of whether the government’s interest-free loan schemes or the regime is in power.