Almost every state has asked for an extension of the compensation mechanism under the Goods and Services Tax (GST) regime, according to Tamil Nadu Finance Minister Palanivel Thiaga Rajan. In an interview with The Indian Express, Thiaga Rajan said the decision on compensation should be taken within the GST Council and there would be a consensus on bringing it if it is decided to be extended. Excerpts:
Did all states demand for an extension of the compensation mechanism beyond June 2022?
Which state doesn’t want (compensation to continue beyond June)? Karnataka and Goa asked for compensation. To the best of my knowledge, all states (want extension of compensation). I don’t know of any single state that hasn’t asked for extension of compensation. What marked this GST Council meeting for me compared to others was that I could truly see that states were talking for their states or for the broader interest. In the past, I felt maybe some of the BJP states were more interested in talking in line with what came from the leadership rather than what was in the interest of their own people.
States were heard on compensation. But what was the word on it from the Centre?
I want to be a bit technical here. If this is truly a federal structure, if the GST Council is really the deciding authority, then on what basis can a decision be made outside the GST Council? I am just asking a mechanical question. We were all in the room. We all made some requests. It didn’t come to a resolution, that’s the best I can tell. Even the Union Finance Minister said in her press briefing that people (states) were heard. Now, in some sense, this is a great improvement because last time when this came up long ago, the Finance Minister said in a press conference that there will be no extension (of compensation). But that was not agreed upon by the GST Council. That was almost a unilateral decision. Here she came and said that it has been discussed and we’ll see, from what I can tell. But who will see? Does the (GST) system give the Union government a separate authority to make decisions? Or is it the GST Council that should have voted on (extension of) compensation. I don’t want to be considered a perma-critic or something. But I want to genuinely appreciate the improvements in the quality of the debate, reduction in partisanship, increase in the logic, and that ministers seem to be speaking more in the interest of the people in a discernible way. Having said all that, we live in a strange world where we have a GST Council that’s supposed to be federal and consensus-based decision making. But any decision on compensation that would happen between today and the next GST Council meeting, how would you consider that cooperative federalism?
Let’s say they (Centre) come back two weeks from now and say no (compensation will not be extended). Is that within the ambit of how the GST was envisioned? Let’s say they come back and say yes (compensation will be extended). Is that also within the ambit of how the GST was envisioned?
Was there any clarity on when they (Centre) will get back?
No. Do you know they are going to get back? We don’t know anything.
Will the correct way be to be put up for voting?
It should be a decision of the GST Council.
Should it be put up for voting?
As the Honourable Union Finance Minister pointed out, there has been voting only one time. Rest of the time, it has been consensus. And I have no doubt that there would be consensus as almost every state asked for it (extension of compensation).
What is the hitch in extending the compensation mechanism given the cess levy period has already been extended for repayment of debt?
Again I ask the question: how did they (Centre) unilaterally decide to extend the cess? What the law says and what happens, there are huge gaps…if the GST Council is the supreme decision making authority, like the Supreme Court has told us what the Constitution says: a statutory body like the GST Council cannot supersede the legislative powers of the elected representatives in the state legislatures and the Parliament as they are constitutional bodies. I said earlier that the judgement should not have caused any real consternation, it just reaffirms that the Constitution applies. But you look at how things work, they are not necessarily following the rules. Some of it could be just practicalities of execution, some of it could be codified in statutory terms. For example, if we all agree that some rate changes have happened, and they have said they will put it into effect by July 18, by applying ordinances or passing the necessary resolution. For it to apply in our states, we all have to either pass the Bills or the notifications. I guarantee you the odds of all 31 (states/UTs) doing it by July 18 is very close to zero. But GSTN (GST Network), which is the effective implementer of the law, will change the settings on July 18 because they are told to do so. Now if they say X percent and the law and regulations in Tamil Nadu still say Y percent, that means we have an anomaly.
So the construct of the GST itself leaves a lot to be desired. Its rushed execution for political reasons, the proclivity of certain leadership to have dramatic announcements, compounded the problem. How many modifications and changes were made in the first hundred days? Many, many. Now it has been five years, I think it is time to do a reasonable review of the GST. Others suggested it and I doubled down on it. In fact, the Honourable Finance Minister of West Bengal even brought up the recent Supreme Court judgement — that in the light of this judgement, should we not discuss what the implications are and whether it changes our effectiveness or capacity to function.
What have been the other issues under GST?
The design of the Council suggests meeting every three months. I have been a member since May 2021. It (GST Council) met once in May 2021. It met once in September 2021. The December 2021 meeting was an emergency one. And now. Why is it that the Council has met once in nine months instead of once in three months when there is so much work to do?
The lack of continuity is another problem. It affects all our governments. Just because one secretary or minister changes, we can’t start from scratch again. I asked why GoMs are set up with the chief minister or deputy chief minister as the convenor. I brought it up in the meeting, one could argue that they are the least likely to have time to spend on ancillary work, they have day jobs that are quite demanding. The answer was: that’s protocol. But then the GoM that was set up in 2019 on the transportation of gold was brought up for discussion in the meeting. And the convenor of this GoM was the finance minister of Kerala and the members included chief ministers of other states. So clearly, this protocol that you only have chief ministers or deputy chief ministers as GoM convenors did not exist in Mr Jaitley’s time or even as late as 2019. It is the execution that worries me a lot, it’s like it operates in some kind of undefined space.
The ratio of direct taxation to indirect taxation has completely skewed after this regime took office. So, as much as I want the GST collections to improve and reduce the loopholes, I am conscious that by nature of indirect taxation, it falls on the poor and middle class disproportionately. With income and corporate tax, you know who you are taking the money from. So you take it progressively. Now take indirect taxes, say, tax on petrol and diesel. By definition this tax is unfair and regressive. If I make Rs 5 lakh a month, I am surely not putting 10 times the petrol or diesel in my cars as someone who earns Rs 50,000 a month is putting…so when we do point of sale taxes, that’s the whole thing of the casino problem we have, we are saying that the middleman is held is pointless. Because the middleman is not paying one paisa of it, he’s pushing it to the end buyer but if the end buyer is unfairly taxed, which is what happens. So, the ratio of direct to indirect taxes, after this government came, they kept cutting the income tax, corporate tax rates, and they are trying to make it up in GST. At best I can tell, even though I am for the GST working well, and being watertight and not having leakages, but at some level it worries me that we are increasingly dependent on the indirect tax, inherently regressive tax revenue. And it becomes more unfair: who gets to set direct taxes? So, they (Centre) get to decide the philosophy of overall taxation, or the ratio of fair to unfair taxes in a way that we don’t get to have input on. With all of that I am a bit conflicted sometimes, especially if you are a rich state, there might be a marginal conflict.
There are some other issues. But every time some activity is entrusted to a GoM, it comes back in black and white with an answer. It may be an answer we all don’t like, or it may be that we like some of it and not the rest. But at least it comes back with an answer. When it goes to the broader 31-member discussion, it floats around. That’s why I specifically asked for a GoM on the Appellate Tribunal. If we can have a GoM on something like horse racing, why should we not have one on something as important as tribunals where it can change the structure of the whole system?
On the compensation issue, the sense from officials and ministers has been that for any such decision to extend, it would require an amendment to the Constitution, so how can it be done?
We have changed a bunch of things, we just have to change the law again. My own view is that most states asked for an extension. Second point is that if there was a spirit of cooperative federalism, it is not any official or minister’s decision to make, it is the decision of the GST Council to make. Should there be a decision anytime in the next few months, a statement that says that compensation shall continue. The immediate question to ask is how did this decision get made when the Council did not deliberate or make the decision? How was this a constitutional limitation which you could not contemplate back in 2021 or 2022 and then you find there is a way after all. My view is that there are so many sophisticated ways of doing some form of compensation without it being too big a burden. But that would be a decision based on good faith — a good faith decision with good quantitative accounting and analysis would give you a solution that would be relatively low cost. So if it was based on good faith to actually help states, and sophisticated structuring and financial accounting and analysis, I don’t think it’s that hard to do. For a government that was able to remove Article 370 overnight, making modifications to the GST constitutional amendment, in the interest of the states, should be a no brainer, zero effort…and I am not blaming or accusing the Honourable Union Finance Minister personally of these things. It is decided at a higher philosophical or political level. The position of the government of the Union of India is not set by the Finance Minister. The Finance Minister does not decide about state rights. Those people (the Union government) I don’t think are really interested in states’ rights or states’ benefits.
Have states come up with solutions?
Every state writes letters, (Tamil Nadu’s) chief minister has written. I’ll tell you an easy technical solution — if they have the good faith, they will do it. If I was in their shoes, I would say it is impossible for me to do a CAGR (compounded annual growth rate) of 14 per cent a year compounded for 10 years including two years of the pandemic pretending the pandemic never happened. The whole problem with the CAGR was that it never envisioned there would be a pandemic. When inflation has devalued the rupee, you are expecting the tax growth rate to be more than your inflation rate. If I were to do this right, it would be to reset everybody to last year’s amount. We lost two years to the pandemic, last year was a kind of recovery year. You still have a relatively low base effect. That means if you get to return to normalcy, you should see a huge bounce up from here. I would say whatever 2021-22 revenues were, we could do 14 per cent on that for the next two years. There’s no way I could use 2017 as the base to do math, it’s illogical, it’s irrelevant, and unpalatable from a cost perspective. But I can use 2021-22, which is effectively the number you were at (before pandemic), plus a bit, compared to 2019-20. Then I could give you 14 per cent a year for two years and you’ll find that some states will need it and some states will not. Before the pandemic, not every state availed of the compensation.
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