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A fraying pact

GST council votes for first time, departing from its consensual decision making model so far. Centre must heed warning

By: Editorial |
December 21, 2019 2:45:31 am
 GST Council, GST Council lotteries taxation, lotteries taxation GST, Kerala government lottery, express editorial The genesis of the distrust seemingly stems from the Centre delaying compensation to states for their revenue loss.

Departing from the consensual nature of decision-making that has marked the GST Council so far, on Wednesday, the council, for the first time, voted on an issue, of the taxation of lotteries. Though the issue has been pending for long, and the Kerala government reportedly stuck to its stance of maintaining the dual rate structure, that the final decision had to be put to a vote illustrates a deterioration in relations between the Centre and states. It goes against the idea and spirit of cooperative federalism. Moreover, this is unlikely to be a one-off. With GST revenues falling well short of expectations, relations between the Centre and states may be further strained as states are likely to press for extending the compensation period by a few years.

The genesis of the distrust seemingly stems from the Centre delaying compensation to states for their revenue loss. Under the GST regime, states have to compensated if their revenue growth falls below 14 per cent each year over the 2015-16 base year. While the practice so far had been to transfer the compensation amount after two months, the Centre delayed payments for August and September, much to the states’ consternation. Though the Centre released Rs 35,298 crore as compensation just prior to the council meeting, and the finance minister said that the Centre was committed to discharging its obligation, several state governments appear unsure. With the economy slowing sharply, there is concern that the amount being collected through the compensation cess will not be enough to compensate for the shortfall in collections this year. The states’ concerns don’t end here. With the Centre’s own revenues likely to fall short of its budgeted target, tax devolution to states will also be lower this year. This will impact their spending. And as much of states’ revenue expenditure is sticky in nature, lower revenues will force them to cut back on capital spending, further intensifying the slowdown. Sensing this, some state governments have asked for relaxing the fiscal deficit limit to 4 per cent. While it is not clear if the Centre will accede to this demand, it does underline the severity of the stress in both Central and state government finances.

In the run-up to this council meeting, suggestions were made to raise tax rates to shore up collections. That the council shied away from doing so at the current juncture is welcome. While rate rationalisation is indeed required — in some sectors inputs are taxed at higher rates as compared to final products — raising taxes when the economy is slowing down would have been counter-productive. What is needed is a comprehensive review of the GST architecture, addressing, in particular, the issues flagged by the CAG.

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First published on: 21-12-2019 at 02:45:31 am
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