Why States Are Demanding End Of GST?

With COVID-19 drying funds and Centre delaying the GST compensation, the states are finding it difficult to run the administration.

Imagine a situation. You are an earning individual, who manages own finances, has worked out a system that takes care of money collection, expenses. One fine day, a person comes along and proposes a new system to manage the finances. He says that he will collect money on your behalf. A part of that money will be directly credited to you. But since you’re shifting to a new system and are sceptical about its viability, the person promises that you will be disbursed the amount of shortfall occurred for a certain period of time. On the promise, you switch to the new system, but as time passes, crisis hits and you are told that the person is not able to meet the shortfall amount promised. The compensation isn’t paid on time and every time you have to ask the person to remember the commitment and pay you the money. You, already struggling to adjust your finances as per the new system, in turn, are asked to borrow money. Wouldn’t that frustrate you?

Well, that’s what Indian states are feeling. With COVID-19 drying funds and Centre delaying the GST compensation, the states are finding it difficult to run the administration. Though after the recent friction between Centre and State, formerly gave in to the demands of the latter, the states have become more desperate for funds due to impending health crisis and contraction of the economy. The Centralised GST system which was supposed to “Reform” India’s federal Tax collection system, eliminate VAT and get rid of layers of Taxes, has ended up being a labyrinthine maze. The states which have found themselves starved of funds are now raising voice against it and even talking about returning to the old tax system.

Uddhav Thackeray Joins The Chorus

Maharashtra, the economic capital of India saw a fall in the GST revenue collection which was Rs 13,579 crore in September 2019. In September 2020, the revenue from GST collection was Rs 13,546 crore – almost a Zero per cent growth. Notably, the state was the worst hit among all the other states due to Pandemic.

Days after the Centre vs State clash over GST compensation, Maharashtra Chief Minister Uddhav Thackeray raised the matter once again during his Dussehra rally speech. He said that Maharashtra has not been refunded its Goods and Service Tax (GST) dues of Rs 38,000 crore. “From all this, it appears that the GST system is proving a hoax and If it is not working, the Prime Minister should honestly admit it and bring back the old system of taxation,” Thackeray thundered.

He also called upon the other state chief ministers facing similar issues to join and meet the PM to discuss and sort out the issue.

The GST Agreement

In 2017, the states were convinced to let go of the federal taxes and adopt the Goods and Services Tax based on a guarantee that they will be duly compensated for the period of five years till 2022. It is calculated at a growth rate of 14% keeping 2015-16 as the base year. To that effect, the Parliament passed the GST (Compensation to States) Act, 2017. The difference between this projected growth and the actual amounts collected by states on account of GST, year-on-year, would be payable by the centre to compensate for any notional shortfall in revenue.

But since the pandemic and subsequent lockdown hit India after the long spell of economic slowdown, the GST collection has tumbled. Thus, the compensation amount that the Centre must pay to the states has gone up but the drying of collection meant that Centre could not fulfil the obligation. The central government compensates states bi-monthly, but since the slowdown, it has stopped the bi-monthly release.

CAG Pulls Up Centre

The Comptroller and Auditor General of India too pulled up Central Govt for violating the provisions of the GST Act. In FYs 2017-18 and 2018-19, the centre collected compensation cess totalling Rs 1,57,693 crore. It released Rs 1,10,421 crore as compensation to the states. However, it failed to transfer the balance amount of Rs 47,272 crore to the Compensation Fund.

According to the CAG report, “The amount by which the cess was short credited was also retained in the CFI and became available for use for purposes other than what was provided in the act. … Short crediting of cess collected during the year led to an overstatement of revenue receipts and understatement of fiscal deficit for the year.”

Centralization of Power for Control

The issue, however, goes beyond the lack of fund for states. The GST system has designed in a way that appears to Centralize the power in the hands of the Central govt. Earlier, the states that had their own Taxation powers, surrendered the powers in lieu of the Compensation promised and guaranteed by the Centre. But now they have to knock on the doors of Central govt every time there is a shortage of funds. The Centre, on the other hand, controls the money supply and appears to be doing a generosity whenever it releases the funds due to the states.

The cash-strapped state means an impact on its’s budgets and spending on essential matters and in public health crisis like COVID-19. So, despite paying taxes, the taxpayers will be adversely impacted. The blame for the lack of provision will- in the public eyes- be on the states.

The opposition-ruled states like Chhattisgarh and Puducherry, apart from Maharashtra have been talking about returning to the old system that gave them more autonomy over taxation powers. It remains to be seen whether other states join them.