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Compensation stalemate: Any extension of GST compensation to states must be linked to clear performance benchmarks

States are being unreasonable because GST revenues have been buoyant, moving from an average monthly collection of Rs 90,000 crore in the initial years to an average of around Rs 1.3-1.4 trillion in the last few months. With the economy recovering and increasingly better compliance, the collections should sustain.

With the economy recovering and increasingly better compliance, the collections should sustain.
With the economy recovering and increasingly better compliance, the collections should sustain.

The Goods and Services Tax (GST) Council has failed to take a call on the contentious issue of compensation to states as there was no consensus on the issue. About a dozen states cutting across party lines pitched for extending the mechanism to compensate them for revenue lost from the implementation of GST beyond June 30, but the Centre has not been in favour of any additional revenue support as collections from the cess, which are utilised to fund the compensation, are inadequate. It has also pointed out earlier that it will take a few more years to repay the borrowings made to compensate states for revenue shortfall.

States are being unreasonable because GST revenues have been buoyant, moving from an average monthly collection of Rs 90,000 crore in the initial years to an average of around Rs 1.3-1.4 trillion in the last few months. With the economy recovering and increasingly better compliance, the collections should sustain.

Revenues can be boosted by withdrawing some of the exemptions. In fact, removing the cess, which is used to fund the revenue shortfall, from goods such as automobiles would help boost the demand for these goods and, in turn, GST revenues. While the states needed support in the initial phase of the GST rollout given it was a completely new regime, the assurance of revenue support may have led to some amount of complacency. Five years is a long enough time to adjust to the new framework. Rather than continue with the compensation, it would be better to fix the many anomalies and the rates so that the uptick in revenues continues.

However, it should not happen that states start levying taxes on their own to protect their revenues because that would defeat the very purpose of having a unified rate of tax across the country. Therefore, if some states insist they need support, the Centre could consider extending the compensation for a short window, of a year or two. The assurance should be accompanied by some performance benchmarks for states’ own tax revenues. States must accept the caveats without accusing the Centre of high-handedness. The fact is that the Centre has bailed out states on several occasions with regard to discom losses, without the states putting in enough efforts to improve their performance.

Simultaneously, the GST Council must work to improve the tax framework. Several of the features have worked very well—the e-way bill mechanism, for instance—but the plethora of rates remains a problem. It would help if the sectors that remain outside the purview of the GST—petro products, energy and electricity—but account for a substantial chunk of the country’s national income are brought into the fold of the levy. The inclusion of these sectors would not just bring down costs as input tax credit would be available, but would also help bring down the general GST rate. Indeed, the revenue neutral rate of 15% needs to be achieved soon and some products moved out of the 28% slab. Economists have attributed the high levels of cash in circulation to transactions being done outside of the GST, especially by companies in the informal sector. Also frequent revisions in rates lead to confusion and litigation, neither of which is desirable. The tax authorities now have an enormous amount of data, which they haven’t made public; if the data is shared, it would be mined effectively.

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