GST compensation cannot be limited to 5 years

For sustaining cooperative federalism, the Goods and Service Tax (GST) compensation cannot be confined to a limited period of five years, say experts of the Gulati Institute of Finance and Taxation (GIFT), an autonomous institution of the State government. They are of the view that as long as there is GST there shall be GST compensation for States.

“The GST Compensation Act is premised on the explicit recognition of the unconditional surrender that the States together have made towards evolving one common market with one tax. Hence, there is reason to believe that in the absence of GST compensation, GST would not have been born,” say K.J. Joseph, Director, and N. Ramalingam, Associate Professor.

Experts say they fail to understand the reason as to how the GST can continue without GST compensation even after five years unless there are mechanisms built in to ensure that the States receive a higher share of the tax revenue.

The States, which together account for around 60% of the combined expenditure of the Centre and the States, have been enticed to compromise with a constitutional guarantee of 14% growth in their tax revenue under GST. Had there been no GST compensation, GST would not have been there for establishing the One Nation, One Tax regime.

The outcome of the GST is that the tax revenue is shared equally between the Centre and the States. Given the equality in the distribution of outcome, the question arises whether the cost of establishing GST has also been equally shared.

The cost is viewed in terms of the pre-GST revenue surrendered by the States and the Centre. The Arvind Subramanian committee report has shown that the revenue forgone by the Centre has been ₹3.28 lakh crore and that by the States ₹3.69 lakh crore. “Our estimate revealed that this amounted to a surrender of 51.8% of the States’ total tax revenue and 28.8% for Centre’s gross tax revenue.”

While in absolute terms the difference is not substantial, in relative terms the surrender by the States is almost twice that of the Centre. GST compensation is the constitutionally paid price for the higher surrender that the States have made, they said.

With the introduction of GST, the 14.5% category goods have been brought under the 12% or 18% category wherein the States’ share being 6% or 9% respectively. Only a few goods were brought under 28%, where in the share of the States is 14%. The States lost 8.5% for those goods brought under 12% and 5.5% in case of those with 18%.

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Printable version | Oct 17, 2021 7:18:36 PM |

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