Tax reforms: Get over GST compensation obsession, focus on reforms by states

    Can India focus on reforms by states instead of being obsessed with GST Compensation?

    For the first time since July 2017 the finance ministry has released state-wise data of GST collections for December 2019 and 2018. Out of `80,849 crore collected, shares of Maharashtra are 20.4%, Karnataka 8.5%, Gujarat 8.2%, Tamil Nadu 7.9%, Uttar Pradesh 6.8%, West Bengal 4.6%, Kerala 2% and Punjab 1.6%.

    Can the finance ministry release state-wise cumulative numbers for April to December 2019 and thereafter release such numbers monthly? On the issue of compensation, we must know that “according to the GST Compensation Act, states will receive GST compensation in case actual SGST collections fall short of projections. The projection of SGST revenue is based on annual growth rate of 14% with reference to net collection subsumed under GST in 2015-16.”

    AK Bhattacharya has highlighted that “14 states projected an SGST revenue growth between 14-27% even though economic growth had already begun decelerating.” Further, states complaining the most about delay in receipt of compensation had projected high SGST collection growth rates. Kerala, for instance, had projected a rate of 26%, Rajasthan had fixed 23% and Madhya Pradesh had estimated 20%, unlike Maharashtra and Gujarat, which projected about a reasonable 14% growth in revenues. (Business Standard, Jan 2)

    Can state finance ministers give reasons for over-optimistic revenue projections? Is administration of GST and economic growth only the responsibility of the central government?

    We are a strange country! While governments are obsessed with increasing revenue, there are hardly any discussions about reducing government expenditure. Does the government realise that imposing a special coal cess, renamed ‘GST compensation cess’, increases fuel cost and impacts competitiveness of India Inc?

    Further, there is so much focus on the work of the central government, when the country is largely run by the states.

    So, then why is the national discourse not focused on states? For instance, there is a need to assess why the situation on state-wise aggregate technical and commercial losses under Ujjwal DISCOM Assurance Yojana.

    Have states hiked electricity rates as promised under UDAY?

    How many states have scrapped the APMC (Agricultural Produce Market Committees) Act and started farmers markets (where farmers sell directly to consumers) in urban centres as Mumbai has. What are mandi tax rates levied on agricultural produce? What is the percentage of land under irrigation and per year increase?

    Also, which states have not implemented RERA (The Real Estate (Regulation and Development) Act? Why are builders not being asked if they have reduced prices substantially to stimulate demand? All that we are told is that the real estate sector is down, adversely affecting employment and growth.

    Do we not realise that if the states alleviated farmer duress, the Centre would not need to introduce schemes like ‘Farmer Income Support’ (`6,000 per annum)

    Importantly, no one speaks about the pressures on the financial and administrative capacity of the Indian State because of a burgeoning population and impact on fiscal deficit because of a more than 100% increase in subsidy owing to Right to Food Act.

    States can learn from companies in this regard. Governments should have sessions where companies like Hindustan Unilever (Disclosure: I worked for Hindustan Lever), with a turnover of Rs 39,310 crore, can organise a training program for state finance ministers and chief secretaries showcasing its relentless focus on cost control? (Disclosure: I worked with Hindustan Lever Limited). Money saved is money earned. Right!

    Another learning from well-managed companies is to use profits made during good times to sail through a downturn. Conversely, for the government it means reduce fiscal deficit when growth rates are high and increase deficit when growth falls.

    We must appreciate the good work in GST implementation because removal of check-posts and barricades from the state borders have reduced travel time substantially. According to Raghu Dayal, “Crisil found that implementation of GST in the logistics industry would reduce logistics costs up to 30% over 3-4 years.” (FE, Jan 1)

    Let us return to the issue of GST compensation to states and what happens after the five year assured return ends in June 2022. At the outset, it must be stated that a 14% assured growth in revenue collection under GST, on a 2015-16 base, is untenable. When the average annual growth rate in VAT, entry tax, and central sales tax (excludes taxes collected by local government and authorities) for 2012-2016 had a range of 3.8 to 12.6%, and exceeded 14% only for Bihar, is the 14% rate justified?

    If the states still feel that it is indeed, can they place in public domain average growth rate of taxes subsumed under GST for ten years prior to its introduction.

    Also, why should all states have a common assured return percentage? Moreover, when anything is guaranteed it invariably results in sub-optimal performance and states with better tax-efficiency are penalised.

    Given the shortfall, there are concerns, regarding the impact of withdrawal of GST compensation beyond June 2022 on India’s fiscal management and, therefore, macroeconomic stability. There are suggestions that the matter needs to be referred to the 15th Finance Commission, even though it does not fall within its purview.

    Since states had given away the right to impose levies, and have limited taxation power, a compensation is certainly desirable.

    Before looking at a new way to pay compensation it is worth comparing monthly revenue under protection (RUP) state-wise for 2022-2023 (NIPFP) with state-wise gross GST collected in December 2019.

    The comparison shows that Andhra Pradesh, Bihar, Kerala, Madhya Pradesh, Rajasthan, Uttar Pradesh and Punjab are where revenue projections are significantly higher than December 2019 actual revenues.

    Can chief ministers pro-actively present a plan on how they will increase economic growth rates and GST revenues? A new way of paying compensation to states could be a debt-equity model that provides a minimum increase and an incentive to tax-efficient states.

    Just like a debt instrument provides an assured return, all states should be provided an assured increase in revenue growth, say, 6%. Whilst capping the maximum compensation payable to states at say 9%, the difference of 3% would be given to states based on national nominal GDP growth and increase in state GST revenues. The Centre must make this process fully transparent.

    Compensation would be funded through a cess as is done presently. Any unutilised balance in the GSTCC in a given year would be transferred ONLY to states in a pre-determined ratio. However, surplus of one year would be adjusted against the compensation payable in the immediate next year. It would not be mandatory for the Centre to fund the cess shortfall.

    Hope this addresses states concerns. If states focus on reforms, cost-control, tax-efficiency, non-GST sources of revenue and sell unprofitable public sector undertakings the uncertainty arising from change in compensation mechanism can be managed.

    Unfortunately, we as people of India are good at blaming others and finding fault but are unable to look within (spiritual) and change ourselves first.

    Source- Financial Express.

The post Tax reforms: Get over GST compensation obsession, focus on reforms by states appeared first on GST Station.



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