GST faces challenges. There is need to bridge trust deficit between Centre and states, uphold cooperative federalism

After five years of switching to GST, the 47th meeting of the GST Board, to be held in Chandigarh on 28-29 June, is expected to adopt proposals aimed at plugging leaks and supporting compliance. It is also likely to consider measures to introduce more stringent vetting and verification of high-risk taxpayers and, on the recommendation of a ministerial committee headed by the Prime Minister of Meghalaya, Konrad Sangma, call for a 28 percent tax on online gaming, casino and horse racing. . In addition, the Council will address several contentious issues. It will not be easy, given that this meeting comes amid growing tensions between the center and the states over the country’s financial structure, and after the recent Supreme Court ruling that confirmed that GST Board decisions are not binding on states.

First of all, the five-year GST offset period—the framework designed to provide certainty to state finances as part of the grand bargain between the Center and the states for GST payment—is coming to an end. Fearing a collapse in their revenue, states have repeatedly called for an extension of this mechanism. Their concerns seem legitimate. As reported in this paper, the average all-India shortfall between protected revenue and the total post-adjustment GST was 27.2 percent in 2021-22, with only five states recording revenue growth higher than GST protected revenue. However, the center has so far not shown any inclination to respond to states’ request. While a few days ago it extended the compensation tax until March 2026, it is only to repay the loans taken over the last few years to compensate the states for the revenue shortfall during the Covid period – the loans amounted to Rs 1.1 crore in 2020-21 and 1.59 crore Rs in 2021-22. Besides, the council will also need to discuss the issue of raising tax rates, bearing in mind that GST collections have not lived up to expectations. According to a study by the Reserve Bank of India, the weighted average GST rate decreased from 14.4 per cent at the time of inception to 11.6 per cent in September 2019. In comparison, the neutral revenue rate was estimated at 15.5 per cent by the Subramanian Commission report. There are many options the council can explore, from increasing lower tax panels to incorporating others. Reportedly, an interim report on the issue of price rationalization submitted by the Government of Morocco headed by Karnataka Chief Minister Basavaraj Bhumi is reportedly expected to be addressed.

The advisory and consensual nature of the decision-making process that has helped guide the Board’s decisions so far must be adhered to. Addressing contentious issues requires, first and foremost, bridging the trust gap between the center and the states. The spirit of cooperative federalism, which is often advocated by the ruling regime, must be upheld.

This editorial first appeared in print on June 28, 2022 under the title “Five year itch”.

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