GST: Modi government's 'cooperative federalism' is facing its first stress test
The derailed GST will soon put India's fledgling cooperative federalism to its first major stress test. With substantial rollbacks, the GST pain is radiating down the government treasuries. The majority of the tax and compliance related GST provisions are highly revenue sensitive; consequently, the recent retreat has rightly rung alarm bells for government budgets. If the proposed rejig in the tax design goes as indicated, then the revamped GST may take a heavy toll on the revenues of the Centre, and especially of the states.
The making of the GST was not the real trial of cooperative federalism. With the help of the central government's generous five-year insurance to the states on account of possible revenue losses under the GST and support for their fiscal laissez faire, GST was born with no labour pain. However, now with the changed scenario, finance minister Arun Jaitley will have to perform the tough task of keeping cooperative federalism intact during the prolonged and excruciating GST transition.
The next GST Council meeting scheduled on November 10 in Guwahati is going to be the crucial one in terms of fiscal concerns around GST. As things stand today, inclusion of petro products and real estate under GST seems unlikely in the near future.
GST, in its doctrine and design, is studded with regressive features just to shield government revenues. However, government finances are set to become the major victim of chaotic GST. No surprises if botched implementation, sagging economy and subsequent rollbacks spell a crisis for fiscal health in the short run.
What is important to note is that GST has fundamentally altered the revenue metrics for the states. Under GST, states have no direct control over as much as 60 per cent of sources of their tax revenues. The GST council will have to decide and regulate those sources collectively.
As of now, what does GST bring to the government treasuries?
Diminishing returns
The pain of diminishing (GST) returns is growing. In the first three months of GST raj, under the monthly filing rule, only half (out of 80 lakh) the assesses have filed their returns. In other words, half of the businesses virtually fell off the GST radar. The number of returns thinned each month till September 2017. October onwards, the GST council allowed taxpayers with Rs 1.5 crore turnover (almost 90 per cent) to file quarterly returns.
This resulted in surprisingly lower revenue mop-up during the first two months of GST rollout. Going by the trajectory of returns, revenue collection for September is unlikely to yield a miracle.
Contrary to the expectations of better compliance, the lower number of returns and revenue drag has left tax mandarins with more questions than answers. With altered return filing and tax payment cycle along with looming tax rate cuts, the GST revenue trajectory will remain sluggish and worrying.
States may get nervous
State governments are getting anxious about revenue transfer from Centre to their treasuries. The lower collection of SGST has made them jittery. The Centre has been reportedly forced to release the first tranche of compensation to the states from the collection of GST cess.
In order to assuage angry Gujarati traders, the GST Council allowed taxpayers with the turnover of Rs 1.5 crore, to make quarterly payment of taxes along with quarterly returns. As majority of the taxpayers under quarterly bracket are in fact the states assesses, this electoral hand-out may upset treasuries of the state.
Meanwhile, the Centre has, reportedly, conveyed to the states that it will transfer the states’ share of federal revenues only once every three months beginning next financial year. The GST compensation transfers to the states will also be made on quarterly basis.
This is the point where cooperative federalism will be tested. For the states, under the new quarterly cycle of revenue collections and central transfers, the fiscal management will be a tough row to hoe. Revenue upset may force states to squeeze expenditure ahead of busy electoral calendar. The deficit position of states is worsening. During FY 2016, the consolidated fiscal deficit of states increased by about 1 percentage point to 3.6 per cent of the GDP.
Centre's conundrum
Fiscally speaking, the GST's breakdown and forthcoming overhaul are comprehensively negative for Centre's finances. The transitional decline in tax mop-up, looming state compensation and slowdown hit revenues will make political largesse awfully tough right on the eve of crucial polls.
In realty, low on fuel
As the state's tryst with GST is yet to yield success, it would be difficult for the Centre to convince members of cooperative federalism on inclusion of petro and real estate in GST. Petro products consist of as much as 40 per cent of states’ revenue kitty.
The only way the Centre can make it happen is by offering compensation to the states against losses under proposed extension. Given its already huge fiscal stress, the Centre just can't afford an increased burden of GST compensation.
As the GST has already been launched, a comprehensive revamp is the only way out, which will definitely be a long-drawn-out process. The worst downside of the flawed GST is that it has derailed economic growth, and repairing it is bound to keep the economy in a state of uncertainty for longer than expected.