Centre plays foul on GST compensation (The Hindu)

Mains Paper 3: Economy
Prelims level: GST compensations
Mains level: Impact of GST on fiscal economy

Context:

• The GST Council has been hailed as a model federal institution, where both the States and the Centre are represented and consensus is arrived through a detailed deliberative processes.
• There has not been a single instance of voting, despite strong differences of opinion voiced on many issues. They were settled in a spirit of give and take.

GST compensation:

• The GST compensation is an integral part of the GST Constitutional Amendment Bill passed by Parliament.
• The compensation is provided in the law to insulate State finances from the shortfall in revenues during the transition to GST, especially since most of the States’ powers in commodity taxation were subsumed in the GST.

Impact of GST on fiscal economy:

• Introduction of the GST also implied serious erosion of States’ fiscal autonomy, and there were also serious doubts regarding how much revenue from the new tax will be available during the initial years.
• The States finally agreed to the GST after being guaranteed a 14 per cent GST revenue per annum.
• Any shortfall from this revenue path would be compensated by the Centre. For this purpose, a cess was imposed on selected luxury and sin goods, from which compensation would be paid to the relevant States in bi monthly instalments.
• In fact, on the suggestion of the GST Council, even the wording in the draft Constitutional Amendment was changed to categorically assert payment of compensation for five years.
• The Compensation Act passed by Parliament provided that: “The compensation payable to a State shall be provisionally calculated and released at the end of every two-month period, and shall be finally calculated for every financial year after the receipt of final revenue figures, as audited by the Comptroller and Audit General of India...”

Available funds

• During 2017-18, the cess collection amounted to ₹62,612 crore, from which ₹41,146 crore was released as compensation payment, leaving a closing balance of ₹21,466 crore.
• In 2018-19, ₹95,081 crore was collected as cess, and ₹69,275 crore was released as compensation, leaving a fund balance of ₹47,272 crore.
• During the first six months of the current financial year, ₹41,574 crore was collected as cess and ₹65,151 crore released as compensation.
• So, at the end of the half-year period, there would be a fund balance of ₹23,695 crore.

Conclusion:

• The simplest solution would be to, if necessary, take a short-term loan to fill up the gap in funds.
• The compensation cess collection can be extended for an additional year or so, till the borrowed amount is recouped.
• However, the Central government seems to be toying with the idea of another rejig of the GST rates

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to the Inner Line Permit (ILP) system, consider the following statements:
1. Citizens of other States require the ILP to visit the protected areas as per the Bengal Eastern Frontier Regulation, 1873.
2. ‘Outsiders’ can visit ‘ILP’ areas for limited period with special permission but are barred from buying immovable property.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C
Mains Questions:
Q.1) What is the outcome of this irresponsible policy of confrontation with the States?