Delay in compensation payment to states brings out the biggest issue with India’s GST model

Kapil Kajal

Bengaluru: When announced in 2017, the Bharatiya Janata Party (BJP) government led by Prime Minister Narendra Modi projected India’s Goods and Services Tax (GST) as country’s biggest and the best tax reform. However, in less than three years, the cracks are showing up, which, if continue, might result in otherwise from what the Modi government had claimed initially.

With the implementation of GST, the states lost some of their major taxation rights. To make up to those losses the Centre promised to compensate them for the next five years. However, the Centre has not paid GST compensation dues, paid every two months, of about Rs 1.5 trillion to the states since April. 

Union Minister of Finance Nirmala Sitharaman blamed that the coronavirus pandemic as “an act of God” that affected the Centre’s revenue collection and left it with little to pay the states. As the demand for the payment grew stronger from the states, the Centre asked them borrow to make up the shortfall.

Many states, especially not ruled by BJP, have written a letter to Sitharaman rejecting the borrowing option. Some states have even threatened to go to the Supreme Court.

Speaking to Nikkei Asian Review, G V Joshi, retired professor of Economics from Mangalore University, “PM Modi’s legacy is in danger now because he made a commitment in 2014 and 2019 about cooperative federalism.”

“We have been following the principals of fiscal federalism i.e. the Centre and the states have been able to maintain their agreements, irrespective of the crisis. However, the Centre is now leaving the states to fend for their own, which is unfair on their part,” he added.

“It (BJP) shatters the strength and the hope of the states, which accepted the GST regime. What the Centre is doing is not constitutionally valid. The states may now demand the old taxation system. If the delayed payments and inability to pay dues continue, the states may call for a rollback,” he estimated.

Some states have borrowed for survival

On August 27, the Centre provided two options to the states.

1: States borrow Rs 970 billion GST shortfall via RBI window and Centre refunds the principal and interest after 2022.

2: States borrow entire Rs 2.35 trillion (GST shortfall and Covid19 related losses) loan from the market, the Centre will only pay the principal amount after 2022, the interest component will have to be paid by the states. 

Twelve states including Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Madhya Pradesh, Meghalaya, Sikkim, Tripura, Uttar Pradesh, Uttarakhand and Odisha so far have opted for the first option offered by the Centre. Out of the 12 states, 10 states are either ruled by the BJP or by a BJP coalition. Manipur has opted for the second option.

As the economy started slowing down in September 2019, the GST collections began to fall resulting in Centre delaying the GST payment. In December 2019 after Kerala threatened to move to the Supreme Court, the Centre started clearing the backlog. It released Rs 199.5 billion for October and November 2019 in February while the dues for December, January and February were cleared in April. The payment of Rs 138 billion for March 2020 was made in July. Payments for the month of April, May, June and July are yet to be made.  

Tax evasion, low GST collection other issues

The Modi government had included the end to tax evasion in the list of GST’s advantages. However, the GST authorities have not been successful in fixing the tax leakage.

Anurag Thakur, Minister of State for Finance, had announced in parliament that Central GST authorities detected GST evasion of Rs 70,206 crore between July 2017 and January 2020. Of this, just Rs 34,591 Crores were recovered, resulting in a loss of over 35,000 crores.

Vikas Kaushik, a Delhi-based chartered accountant told NAR that there are many companies that do billing without any stock movement. Such companies give fake bills to other companies so they can claim the input tax credit, he added.

“Physical verification is not at par in the current regime of GST due to which such companies maintain to grow,” he added.

Arun Kumar, the Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences, stated that the credit for bringing GST goes to Arun Jaitley who had agreed to compensate the states, but the current cabinet has failed Jaitley’s efforts.

The GST was implemented owing to the pressure from the International Monetary Fund, big industries and multinational corporations as these industries thought they would get huge benefits, Arun highlighted. “Though the unorganised sector is exempted from GST, due to exemption, they didn’t get the input tax credit (reducing the taxes paid on inputs from taxes to be paid on output), so the selling price increased,” he explained.

Owing to that, the demand shifted from the unorganised to organised sector, and initially, the organised sector benefited from it, but later their sales also started going down, he asserted.