So, when a special GST meeting is called, the states would do well to focus on the real issues instead of trying to exert pressure on the Centre to dip into its own kitty to pay them compensation.
Given state governments have not got their GST compensation—this is guaranteed when their revenue-growth falls below a certain level—for the months of August and September, and the chances of getting the full compensation for the rest of the year also look bleak, it is not surprising they are up in arms. A joint statement by the finance ministers of four non-BJP states—Kerala, Punjab, Rajasthan and West Bengal—points out that, with GST comprising nearly 60% of the tax revenues of states, this is “literally bringing activities of the States to a grinding halt”. A day prior to this, West Bengal finance minister Amit Mitra wrote to union finance minister Nirmala Sitharaman, asking her to convene a meeting urgently to discuss ways to augment revenues, and to set up an effective mechanism to detect and avert input tax credit (ITC) frauds. It is not clear how large ITC fraud is, but given the Centre caught ITC frauds worth Rs 11,500 crore last year, the total fraud could be in the region of Rs 100,000 crore a year; estimates are the government catches 10-15% of theft. Since higher collections of Rs 100,000 crore per year would be enough to ensure the states get fully compensated, Mitra was right in pointing out that development of business intelligence systems to detect such frauds, and setting up dedicated units in each state, is the need of the hour.
It is, of course, not clear how Mitra thinks all fraud can be caught, and within a few months. And, surely the fact that the economy is growing much slower than last year—FY20 growth could be 5.5%-5.75% as compared to FY19’s 6.8%—would also have contributed to the slowdown in collections; more so, when you look at how sales of automobiles that are taxed at the highest rate have fared so far in the year.
While it is true that states were promised a compensation, the four state finance ministers are stretching credulity a bit when they say “it was recalled that the assurance of GST compensation was a necessary enabler in States agreeing to subsume their fiscal sovereignty into GST” since the suggestion is that Sitharaman dip into the Centre’s tax kitty to pay states the compensation. The GST Act did provide for compensation—paying this if state revenues failed to grow at 14% was more than a bit generous—but, this was to be paid out of the compensation cess; if the cess fell short—as it is now, thanks to the slowdown in sales of automobiles, for instance—there is no mechanism to ensure the states get paid.
The only way to ensure GST grows faster, then, is to reduce the number of items that are not taxed at all, and to raise the tax slabs of 5% and 12% and, over time, also reduce the 28% rate so that GST settles in the 14-16% range; as the number of slabs, and the gaps between them reduce, tax evasion will also fall. And, while it is true that there are problems with the GST system that need to be ironed out, it has to be worrying that 28 months after GST started, the annual returns for even FY18 have not been filed as yet; the last date was this month, and that has just been pushed to December 2019. Nor has, till now, an acceptable solution been implemented for invoice-matching that is at the heart of the GST system. So, when a special GST meeting is called, the states would do well to focus on the real issues instead of trying to exert pressure on the Centre to dip into its own kitty to pay them compensation.