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The GST Compensation Impasse – A Happy Ending

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GST is far too important to be trifled around with; to be subjected to a tussle between the Centre and the States.

The GST Compensation Impasse – A Happy Ending
On a day when the Sensex crashed by over 1000 points, the NIFTY by over 11,700 points and investor wealth in excess of Rs. 3.9 lakh crore was wiped off the market, the announcement that the estimated shortfall of Rs 1.1 lakh crore of the GST Compensation Cess will be met by the Government of India was something to cheer about. This will hopefully bring to an end a dark chapter in federal relations. And more importantly, bridge the trust deficit between the Centre and the States.
To briefly recapitulate, the Centre had proposed two options to make good the shortage in the amount of cess required for compensating the States. In both options, the borrowing was to be done by the States albeit facilitated by the Centre. In the first instance, the Centre offered to fund the principal and the interest through the compensation cess window which would accordingly be extended beyond the transition period; in the second the offer was restricted to repayment of the principal from the proceeds of cess. Ten states had rejected both options insisting that the borrowing should be done by the Centre in keeping with the Constitutional guarantee. The GST council meeting convened on October 13 which was a continuation of the 42nd meeting of October 5 could not break the impasse. On the contrary, it appeared that positions all-around had hardened. There was talk of the disgruntled States moving the Apex court.
It was in this background the Centre released a press statement at 1805 hours last evening informing that ‘ under option 1 , States were to be provided a special window of borrowing of Rs 1.1 lakh crore and above that an authorisation for additional open market borrowing of 0.5 percent of their gross state domestic product(GSDP) '. The press statement does not make mention of the imbroglio. Nor the insistence of the Centre that the borrowing will have to be done by the States; or that the Centre had considered the fervent requests, bordering on threats, of the opposition States. It blandly goes on to mention that the estimated shortfall of Rs1.1 lakh crore will be borrowed by the Government of India inappropriate tranches. Further, it states that the amount so borrowed will be passed on to the States as a back to back loan in lieu of GST compensation cess releases.
This is a huge gesture by the Centre. It should not be construed as a loss of face for the Centre but a victory for cooperative federalism. A recognition that GST is far too important to be trifled around with; to be subjected to a tussle between the Centre and the States. The opposition States should respond with the same amount of magnanimity and accept the offer and let bygones be bygones. There are far too many critical issues which the country is facing for this distraction to continue indefinitely.
The press note is silent on the funding of the borrowing. It would be safe to assume that the recommendation of the 42nd GST council meeting that the ‘levy of compensation cess be extended beyond the transition period of five years i.e. beyond June 2022 and for such period as may be required to meet the revenue gap’ will be suitably operationalised. This will mean that the definition of ‘transition period’ in section 2( r) of the GST (Compensation to States) Act would need to be amended to read as any period as determined by the GST council; section 8 (1) of the Act ibid would also similarly need to be amended to indicate that the levy and collection of cess will extend beyond the period of five years. More specifically, till such period as may be prescribed on the recommendations of the Council. This will require the endorsement of Parliament. However, these are matters of detail on which there should be no disagreement.
The compensation matter hopefully having been put to rest should prompt the GST Council to examine other issues. This is an opportune moment to look closely at expanding the GST coverage-petroleum products, real estate, electricity should be brought within the GST ambit, exemptions should be reduced. The functioning of GSTN which provides the technology backbone to GST should be reviewed.
The States need to introspect. Having been assured of compensation there is a dangerous revenue complacency. They cannot afford to be lax. Evasion needs to be checked—more than 3 years after the launch of GST we cannot afford to keep having leakages. Data analytics needs to be strengthened.
All these measures are essential to ensure that revenue increases and the requirement of compensation reduces. It should never be forgotten that increasing the time period for imposition and collection of cess to finance the borrowing will be a burden which will be borne ultimately by the ordinary citizens of the country.
Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
Read his other columns here
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