GST consensus under threat as revenue falls

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Consensus has guided 40 meetings of the Goods and Services Tax (GST) Council since its inception, but differences between the Centre and fiscally stressed states within the federal tax body are becoming increasingly difficult to reconcile.

The Council, which will meet later this month, is set to see sharp differences emerge over the central government’s obligation to make up for states’ GST losses, which has gone up due to the two-month national lockdown to contain the coronavirus pandemic, a situation that wasn’t anticipated in GST laws.

States have for long been complaining about delays in getting their assured compensation. Some states such as Kerala have been demanding the Centre borrow from the market to pay dues to states. They contend that the Centre can repay the borrowings by extending the cess imposition on items such as automobiles and tobacco beyond 2022 when these levies expire.

Bihar deputy chief minister Sushil Kumar Modi, who is the convenor of several ministerial panels within the GST Council and is regarded as the go-to person for resolving disputes within the council, said in an interview that states may make statements for political reasons but they need to be realistic about their compensation demands as the Union government is also facing revenue losses. 

Among the numerous decisions taken so far, the only issue on which the Council had to resort to voting for settlement was taxation of lotteries due to differences among states.

Modi, who is also the convenor of the group of ministers on revenue analysis, said that the Centre can compensate states only from the revenue collected in the compensation cess fund, not from the Consolidated Fund of India. “The law does not provide that the central government will at any cost provide compensation to the states. It is to be given from the compensation cess fund. It is another thing that states may issue any kind of political statement,” said Modi. He said that the options before the council for addressing the compensation requirement increasing the tax rates and extending the coverage of the GST cess cannot be taken up in the immediate future due to the pandemic situation.

He also said borrowing by the Centre is not an option. “I do not think the central government can borrow. Who will repay and who will pay interest? There is no guarantee either that states’ losses will not persist for the next four or five years,” said Modi.

Kerala finance minister Thomas Isaac told the council at its meeting in December, citing its former chairperson Arun Jaitley, that the council could borrow to fund the compensation requirement and extend the levy of cess from five to six years, minutes of the meeting showed.

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