Centre plays foul on GST compensation (Why states are on the back foot)

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 Centre plays foul on GST compensation (Why states are on the back foot)

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• The GST Council: It is called "a model federal institution" with stakes of both the States and the Centre represented. Decisions happen with consensus, post-deliberations. Voting has always been avoided, via give-and-take.
• Serious trouble: The delayed payments of GST compensation has cast a deep shadow on the Council. With two bi-monthly instalments pending, the total went to more than Rs.35,000 cr (Oct and Dec). The states were left clueless on financial management.
• Impact: The states started borrowing from the RBI (ways-and-means advances) or by overdraft. Many expenses have been cut back on.
• GST compensation: This is not any kindness, but a constitutional responsibility of the Central govt. as per law.

1. State finances will be insulated from revenue shortfalls during GST transition phase, at least for 5 years.
2. A minimum 14% guaranteed revenue growth had convinced states to join the GST regime, from 2017.
3. Any shortfalls in above growth will be met for by a cess on luxury and sin goods, and to be paid to States bi-monthly.

• The figures:

1. 2017-18 - Cess collected Rs.62,612 cr, compensation cess paid Rs.41,146 cr. Closing balance Rs.21,466 cr.
2. 2018-19 - Cess collected Rs.95,081 cr, compensation cess paid Rs.69,275 cr. Closing balance Rs.47,272 cr.
3. 2019-20 - First six months - Cess collected Rs.41,574 cr, compensation cess paid Rs.65,151 cr. Closing balance Rs.23,695 cr.
4. Add the Sept-Oct collection and enough money is available. But payment was not made!

• A strange suggestion: In the Goa meeting of GST Council, the 15th Finance Commission Chairman suggested a possible scrapping of (or change in) the compensation package! States rejected it. In fact, if Oct 2019 payments were made in time, states would have happily discussed 'what to do in case of shortfalls'.
• What's up: The Central govt. is perhaps now trying to rejig GST rates, by pushing up the 5% lower slab rate. It pushed a change to the 28% slab prior to 2019 LS elections, hurting revenues badly. Now raise the lower rate to make up for it? Where is canon of equity in taxation?
• From slowdown to recession: States account for 60% of overall govt. expenditure in India.By enforcing a cut in expenditure of States, the Centre is ensuring that instead of a fiscally expansionary policy that would've helped fight the slowdown, the states will contribute to a recession.
• Summary : The delayed payment of GST compensation to states will not only harm their trust in the GST regime, but also perhaps convert the slowdown into a recession.

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