Lost opportunity: Centre’s narrow legal view on GST compensation

The GST Council meeting on Thursday ended on a mixed note. It met to solve the problem of compensating states for a shortfall in tax collection, an issue that’s driven a wedge between the Centre and some states. On the positive side, a solution emerged. But it left many states dissatisfied. The compensation issue has put stress on federalism and the solution merely papers over the cracks.

GST’s legislative framework includes a guarantee to compensate states for a five-year period in the event tax collections stay below a threshold. That’s inevitable this year. The compensation is to come from cess levied on some products. This collection is inadequate and states expected the Centre to bridge the gap. However, the Centre has taken a narrow legal view of its obligations following the attorney general’s opinion. States will have to borrow to make up for the shortfall. This misses the wood for the trees. GST is not a trivial thing. It’s a hugely ambitious change in political economy. States were persuaded to voluntarily give up their unilateral powers to tax some areas to create a common market. The compensation guarantee was part of the grand bargain.

Now, states have asked for the Centre’s solution in writing and will have a week to choose between one of two options to borrow. A consequence is that the compensation cess on some products will continue after the five-year period to pay off the loans. Legally, the Centre may be on safe ground. But in terms of political economy, it’s a setback. The proposed solution will erode the trust between the Centre and states and may spill over into other areas. Economic reforms require states to do the heavy lifting. They need a sympathetic Centre, guided by an economic vision and not legal opinions.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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