The Goods and Services Tax (GST) Council was launched in 2017 with the promise of cooperative federalism. However, 2020 would be remembered as the year that saw the breakdown of the spirit of federalism in the
GST Council.
Even after multiple meetings exclusively to resolve the compensation issue, the GST Council failed to reach a consensus on borrowing options that had been provided by the Centre in lieu of the compensation cess shortfall.
The Indian economy was already in a slowdown when the COVID-19 pandemic hit. This was reflected in the weak economic indicators and a slowing GST collection. In October, payments to states were delayed as the collection was lower than expected.
Under GST law, states were guaranteed payment for any loss of revenue in the first five years of the GST implementation, starting July 1, 2017. The shortfall is calculated assuming a 14 percent annual growth in GST collections by states over the base year of 2015-16.
States were promised compensation for any revenue shortfall till 2022, in case they go below the 14 percent annual growth since the GST rollout in 2017.
The problem of drying revenues was exacerbated by the Covid-19 pandemic and the ensuing lockdown. Economic activities came to a standstill, and even after the resumption of the economy, consumption has been at an all-time low.
To resolve the compensation issue, Finance Minister Nirmala Sitharaman, in the August 27 GST Council meeting, proposed two options to states -- they could borrow Rs 97,000 crore (on account of GST implementation) through a special window facilitated by the RBI, or borrow the complete shortfall of Rs 2.35 lakh crore (including Rs 1.38 lakh crore due to COVID) from the market. The amounts under the two options were later revised to Rs 1.10 lakh crore and Rs 1.8 lakh crore, respectively.
This led to a stand-off between the Centre and opposing states and the subsequent GST Council meetings failed to arrive at a consensus over the options. The opposing states wanted a third option, where the Centre would borrow on behalf of the states because states felt the debt to meet the compensation gap on states' balance sheet might limit their borrowing capacity in future.
As the Council failed to reach a consensus, FM Sitharaman noted that some states questioned whether the Council had the authority to disallow those who opted for one of the two borrowing options from going ahead with their plans.
The next day, the government allowed 20 states to raise an additional Rs 68,825 crore through open market borrowings.
However, things changed after Kerala Finance Minister Thomas Isaac publicly said a few states were considering taking the Centre to court on the issue of GST compensation. On the same evening, the finance ministry announced it will borrow Rs 1.1 lakh crore and lend the amount to the states under a special borrowing window, instead of states borrowing directly.
Failing to adhere to the spirit of corporate federalism hasn't been the only failure of the GST regime. Drying revenues even before the pandemic struck and expert suggestions have made the government consider a rate rejig. In 2019, the government had set up a high-level committee of officers to look into revenue shortfall and suggest measures for augmenting collections.
Another long-standing demand has been bringing petroleum products within the GST fold. The Central government included petroleum products within the ambit of GST, however, five products - crude oil, petrol, diesel, aviation turbine fuel and natural gas - were temporarily excluded. They were to be included whenever the GST Council decided to do so.
The new decade would have otherwise held forth the promise of a GST rate rejig but with the Indian economy grappling with a recession, the wait might get longer.
Source:-moneycontrol.com