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The spirit of cooperative federalism, often advocated by the ruling dispensation, must be upheld.Five years after the shift to the Goods and Services Tax, the 47th meeting of the GST Council, scheduled to be held in Chandigarh on June 28-29, is expected to take up proposals aimed at plugging leakages and shoring up compliance. It is also likely to consider measures for stricter scrutiny and verification of high risk tax payers, and take a call on the recommendation by the ministerial panel headed by Meghalaya Chief Minister Conrad Sangma to levy 28 per cent tax on online gaming, casino and horse racing. In addition to these, the Council will address several contentious issues. It will not be easy, given that this meeting comes amidst growing tensions between the Centre and the states over the country’s fiscal architecture, and after a recent Supreme Court judgment which emphasised that decisions of the GST Council are not binding on states.
To begin with, the five-year GST compensation period — the framework designed to provide certainty to state finances as part of the grand bargain struck between the Centre and the states to push through GST — is coming to an end. Fearing a collapse in their revenues, states have repeatedly asked for an extension of this mechanism. Their concerns appear legitimate. As reported in this paper, the all-India average shortfall between the protected revenues and the post-settlement gross state GST was 27.2 per cent in 2021-22, with only five states registering a revenue growth higher than the protected GST revenues. However, so far, the Centre has shown no inclination to accede to the states request. While a few days ago, it did extend the compensation levy till March 2026, it is only to repay the loans taken over the past few years to compensate states for the shortfall in revenue during the Covid period — borrowings stood at Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22. Alongside, the Council will also need to deliberate on the issue of raising tax rates, considering that GST collections have fallen well short of expectations. As per a study by the Reserve Bank of India, the weighted average GST tax rate has declined from 14.4 per cent at the time of inception to 11.6 per cent in September 2019. In comparison, the revenue neutral rate was estimated at 15.5 per cent by the Subramanian Committee report. There are several options that the Council can explore, ranging from increasing the lower tax slabs to merging others. Reportedly, it is expected to take up an interim report on the issue of rate rationalisation submitted by the GoM headed by Karnataka Chief Minister Basavaraj Bommai.
The consultative and consensual nature of decision-making that has helped guide the Council’s decisions so far must be adhered to. Addressing the contentious issues will, first and foremost, require bridging the trust deficit between the Centre and states. The spirit of cooperative federalism, often advocated by the ruling dispensation, must be upheld.
This editorial first appeared in the print edition on June 28, 2022 under the title ‘Five year itch’.
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