The meeting of the Goods and Services Tax (GST) Council over the weekend turned out to be inconclusive, with some of the states sparring with the Centre over issues such as dual control or sharing of administrative powers for overseeing the new taxation regime. This comes even as the Narendra Modi government is desperately attempting to push through enabling bills relating to the GST in the current session of Parliament. The Centre may well be in a hurry to get these passed in order to meet the deadline of April 1, 2017 to roll out the new taxation regime, which will pave the way for a national market and has the potential to boost growth in the medium term.
Unfortunately, though, all this is at a time when states are facing a “double whammy” — as West Bengal’s finance minister, Amit Mitra, put it — in the form of a slowdown and a hit to their revenues from the Modi government’s decision to scrap high value notes. That’s why states, especially those ruled by non-BJP parties, are seeking a discussion on demonetisation in the GST Council, even though there are those — including at the Centre — who are arguing that the two (GST and demonetisation) are unrelated. Technically speaking, they may not be, but the fact is the decision to demonetise has, in one sense, been like a force majeure event for states, already weighed down by lower revenues from the general economic slowdown and the slide in commodity prices. The huge impact on consumption and state revenue collections on account of demonetisation — which was, after all, a decision of the Centre — cannot be ignored.
Of course, it can be argued that the revenue concerns of states will anyway be addressed, since the compensation formula on account of possible revenue loss from the transition to GST envisages 2015-16 as the base year, with 14 per cent revenue growth being built on that for the next year onwards. Having said that, this may not be a tactically opportune time for the Centre to be seen as browbeating the states into getting GST implemented. India’s history of reforms, including the one relating to Value Added Tax, shows that even though there have been delays on the way, much of the progress achieved has been on the back of broader consensus. The Centre should show some flexibility on compensating states for revenue losses suffered because of demonetisation in the current fiscal, apart from allowing them greater leeway to borrow in what is undoubtedly an exceptional economic situation. There is always merit in getting all states, including Opposition-ruled, on board in big reform decisions. GST certainly falls under that category.