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GST Arrears

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August 28, 2020

Why in news?

The Goods and Services Tax (GST) Council has deepened the Centre-States rift over the issue of GST compensation arrears due to them.

What did the Centre propose?

  • An estimated figure of ₹3 lakh crore was due as compensation to States for falling short of the 14% annual target under the GST Act.
  • The Centre has now proposed that it give only ₹1.62 lakh crore.

How did the Centre jeopardise the GST system’s future?

  • There is no argument against the principle that a 14% annual increase was never really on the cards this year, after the Covid-19 outbreak.
  • But, this 14% increase was added as compensation to the States for transiting into the new system and forgoing their revenue gathering powers.
  • The Centre did not negotiate with the States regarding the transition to a new compensation arrangement.
  • By doing so, the Centre has jeopardised the future of the GST system.

What is the Centre’s proposal regarding the assistance to States?

  • The Centre said that it will assist the States in getting loans at G-Sec rates.
  • This will give them two ‘options’ on the extent of loan that they can take.
  • This proposal does not seem to have gone down well with some States.

How did the States react?

  • With the Centre being perceived as high-handed, the Chief Minister of Maharashtra has said that it is perhaps time to exit the GST.
  • Punjab, Chhattisgarh and Puducherry have voiced their displeasure.
  • But, the GST came into being as a showpiece of cooperative federalism.
  • It took a Constitutional Amendment to create the GST Council and a new indirect tax architecture.
  • All these efforts were taken to usher simplicity and uniformity in indirect taxes across regions. These efforts should not go in vain.

What could the Centre do?

  • The Centre can prolong the compensation period beyond July 2022.
  • It can offer a greater share of the revenues (the SGST part) to the States.
  • It is important to bear in mind that the States’ finances are under stress due to Covid-related welfare commitments.
  • While States have to bear some of the burden, the Centre cannot absolve itself of its constitutional commitment.
  • The Centre needs to invest time and energy in ‘statecraft’ - in reaching across to States and bridging an alarming trust deficit.
  • It should reconsider ‘conditionalities’ for the States to exceed the FRBM limit by more than 0.5% of the SGDP.
  • The GST Council should arrest the imminent slide into chaos in these unprecedented times.


Source: Business Line

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