The impasse in the GST Council on the issue of compensating states for the shortfall in their protected revenues remained unresolved at its 42nd meeting on Monday. The divisions between the Centre and the states seem to be drawn along political lines, with states ruled by the BJP and its allies opting for one of the options proposed by the Centre, while Opposition-ruled states continue to oppose the Centre’s formulation. This is unfortunate. The GST Council has long been held up as an example of the spirit of cooperative federalism the NDA government professes commitment to. Yet the manner in which this issue has been dealt with suggests that the consensual decision-making process that has largely guided the Council’s deliberations so far is being given the go-by.
The two options presented by the Centre place the burden of the shortfall in GST revenues squarely on the states. Opting for either of them absolves the Centre of any obligation of having to protect the states’ revenues — in direct contravention of the grand bargain struck between the Centre and the states in order to shift to this new indirect tax architecture. Moreover, the complications arising out of the shortfall are unlikely to be limited to this year. It is likely that collections through the compensation cess will not be enough to bridge the shortfall next year as well. Thus, the Council will also have to deliberate on whether the same formulation will be adopted next year. This will also have a bearing on the extent to which the GST compensation cess is levied beyond the five-year period.
If by the next Council meeting, scheduled for October 12, an acceptable resolution is not found, it could well mean that the Council is headed for voting on the issue. Votes cast along political lines will only deepen the chasm between the Centre and states and make such negotiations in the future, needed in a federal polity, increasingly difficult. It is still not too late for the Centre to adopt a more conciliatory approach. The solution has to be both political and economic: In a federal polity, decision-making should be consensual in nature, rather than being driven by the force of brute majority, and at the same time, the Centre should assure states, who are at the forefront of fighting the COVID pandemic, of adequate resources.
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