Is GST ‘Mess’ Due To COVID Crisis? No, It Was A Long Time Coming

You can blame COVID for this mess, but this was bound to happen, given the architecture of the GST-regime.

Image used for representational purposes.

(Photo: Altered by The Quint)

One night, in late March 2020, when the lockdown came, unplanned for, many a tippler found that their spirits, or the stocks thereof, were critically low. But they were not the only ones to mourn the coming dry-days: so were state governments. After all, states have only three things that they can tax – alcohol, fuel and property registration. So, most of them are keen that their inhabitants sacrifice their livers for the greater good of state finances.

This has happened because India’s mega economic slowdown – which started well before COVID-19 came visiting – has caused a massive shortfall in GST earnings of states for the past year.

Now, the GST law assures states a 14 percent increase in their revenue, every year, till 2022. If that doesn’t happen from their share of the tax, then the Centre is supposed to fill the gap. Where is this money supposed to come from? From a special compensation cess levied on ‘sins’ and ‘demerit’ goods, such as tobacco and luxury cars.

Sadly for the Modi government, people don’t even have enough money to be sinful. So, the Centre just hasn’t collected enough to pay the states the compensation due to them.

Why Is Centre Going Back On Constitutional Commitment?

Right now, the Modi sarkaar owes states a cumulative amount of about three lakh crore rupees. But the Centre has no cash, and that’s causing a clash, not just with Opposition-ruled states, but also some of the BJP’s own state governments.

States haven’t got their money in time since August 2019, and the compensation due to them for the lockdown period hasn’t been paid yet. Opposition governments say this is nothing short of a ‘sovereign default’ and a ‘betrayal’ of the spirit of GST.

In fact, there were many state governments who were opposed to the ‘one-nation-one-tax’ idea, and only the Centre’s guarantee that their revenues will keep growing at a fixed high rate for the next five years had brought them on board.

Now, just three years into the new tax regime, the Centre is going back on its constitutional commitment.

FM Nirmala Sitharaman says COVID-19 is an “act of God” and agreements will have to be reworked in such circumstances. She might have a point there. The COVID-induced global recession is a Black Swan event, and no one could have predicted it. However, the FM still needs to explain why compensation dues to states were repeatedly delayed since 2019, and state governments had to keep badgering the Centre to pay up. All this happened before the lockdown caused a complete economic disruption.

GST Is An Inherently Anti-Federal Tax

Right now, the Modi government is asking states to take whatever they would have earned in 2019, without the promised 14 percent revenue growth. Along with that, states are also being told that the RBI will arrange loans for them to meet their revenue shortfall. One proposal is that the interest payments will be financed by extending the compensation cess beyond the 2022 end-date.

But state governments – including the one in Bihar, where the BJP has its own deputy-CM – are saying that the Centre is morally duty-bound to pay-up. If it doesn’t have the money, then it should borrow, instead of asking states to do it.

You can blame the novel coronavirus for this mess, but some would argue this was bound to happen, sooner than later, given the architecture of the GST-regime. Because, GST is an inherently anti-federal tax. 

Our country was originally meant to be a ‘United States of India’, even if we didn’t take federalism as seriously as the US does. Each state is culturally, socially and politically unique, with its own requirements of customised economic solutions. States vote different political parties into power, based on their specific programmes.

Parties should have the right to present their own economic agenda to the people and ask them to vote for it.

So, for parties to deliver on their promises they need to be able to implement their own tax policies. This means they should have more tax-related autonomy, not less.

GST Undercuts Very Premise Of Federalism

GST undercuts this very premise of federalism, and all political parties, whether in power or not, have known this. So, the 14 percent revenue-growth-guarantee was a crucial tactical carrot that was needed to lure states onto the GST platform. However, this meant that the GST-regime had to collect more taxes than what the Centre and states were getting earlier, to make sure the guarantee could be met.

Given that India’s economy has been floundering for the past decade, trying to squeeze out more taxes from people was only going to make them buy less.

On top of that, GST has also hit the unorganised sector badly. As we all know, that the only advantage those working in the informal sector have over ‘branded’ goods and services is that they don’t give you a bill, aka, they don’t pay taxes. GST forced them to become tax-paying vendors, even when they were below the threshold limit. That’s because buying from unregistered vendors meant you couldn’t ask for input credit, when it was your turn to pay GST.

Since the informal sector accounts for most jobs, GST caused a sharp rise in unemployment over the past couple of years.

And unemployment inevitably reduces the overall demand in the economy.

COVID Has Only Worsened GST Crisis

This forced ‘formalisation’ has also caused a hidden inflation that official data cannot fully capture. Consumers who were buying ‘without bills’ earlier are paying more now because of GST. And when you have to pay 18 percent more for something, you invariably think twice. That’s one more GST-induced demand dampener.

So, it was inevitable that the GST-regime implemented in India was going to cause a crisis at some point. This crisis began to develop a year ago. COVID-19 has only deepened it further. It is time to rethink the tax completely. Otherwise, it will continue to live up to its reputation of being a Galat Salat Tax.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)