Relevance : GS Paper II
Theme of the article
Not only are the States not paid what is due to them, they have also lost the powers to raise their own sales tax revenues.
Context
Recently, some States decided to permit liquor shops to open. Permitting the sale of alcohol during the lockdown is an unpopular move among the majority.
Problems caused by GST
- Financially broke State governments are forced to adopt desperate measures such as opening liquor shops to mobilise money for their fight against COVID-19.
- GST forced the States to surrender their powers to raise resources independently through local State taxes and place them entirely at the mercy of the Centre for most of their financial needs.
- For the sake of GST, States sacrificed their fiscal powers in the promise of ‘economic efficiency’ and ‘tax buoyancy’, which never materialised.
- Under GST, States are legally entitled to their share of tax revenues collected in their State. But they are now reliant on the Centre to release these funds to them periodically.
- When the GST was enacted, States were also guaranteed a minimum tax revenue every year for a period of five years. In the midst of the current pandemic, the Centre has reneged on both these promises.
- This is a triple blow for the States — not being paid what they are owed, not being helped with additional resources, and bearing the brunt of the pandemic’s impact.
- Not only are they not paid what is rightfully due to them, they have also lost the powers to raise their own sales tax revenues.
Why States resorted to sale of Alcohol?
- The options available for States to raise funds are through taxes on sale of petroleum products, alcohol, lottery tickets, electricity, land or vehicle registration.
- During this extreme lockdown, demand for petroleum products, electricity, land and vehicles has dwindled substantially. So, the only option left for most States is to raise funds through the sale of alcohol.
- For the large, richer States, alcohol sales account for more than one-third of their State tax revenues.
Can’t the States borrow money to tide over this crisis?
In order to do that, they need the Centre’s approval to raise their borrowing limit or to stand as guarantors. Since States do not have clear revenue visibility, the rates at which they can borrow are very high and their ability to borrow is severely undermined. They are once again dependent on the Centre to borrow funds from the market and then release them to the States.
How would the States have handled this crisis in the pre-GST era?
- One, they would have had the funds raised through sales taxes to themselves and not be at the Centre’s mercy to release funds.
- Two, they would have raised taxes on select essential goods sold in their States (say, mangoes or coconut oil) in accordance with their norms.
Conclusion
The Centre has defaulted on its financial obligations to the States at a critical juncture. The idea of “cooperative federalism” has proved to be neither cooperative nor federalist in times of this crisis. The idea of ‘one nation, one tax’ is flawed in an economically and politically divergent India.
Beyond the article
Additional dimensions that need to be grasped for a comprehensive perspective are as follows:
- fiscal federalism in India
- GST- pros and cons
- role of Finance Commission
- cooperative federalism
- centre state financial relations
