One Year Of GST: States Needing Little Compensation Has To Be Biggest Relief For Centre

When the clock strikes 12 tonight, it will be the first anniversary of the implementation of the Goods and Services Tax (GST). India’s biggest indirect tax reform to date was launched at midnight on 1 July 2017 by Prime Minister Narendra Modi and the then President Pranab Mukherjee in Parliament’s central hall. Since the GST was in works for months, hardly any aspect of it escaped scrutiny from public policy analysts, commentators and economists, professional or otherwise. Many features of the reform were hailed. Many an alarm were raised too. One year later, we can see that while the positives are playing out as expected, many negative predictions stand belied.

Take for instance, inflation rate. While Chief Economic Adviser Arvind Subramanian kept assuring that GST will not cause inflation to rise, many ‘experts’ kept on repeating that it will be inflationary. It didn’t. Ditto for warnings on collections, adding new number of taxpayers, traders’ revolt due to loss of business and what not.

But perhaps what must’ve worried even the centre most was the situation where the revenue of the states doesn’t grow at 14 per cent rate annually under the new system. This was the minimum tax growth rate that the states were promised failing which the centre would’ve to compensate them for five years with 2015-16 decided as base year. It was a deal breaker. There wouldn’t probably have been any GST without this assurance. Failing on this front wasn’t an option as it would’ve shaken the trust in the reform and sound the clarion calls ringing for its abolition. The centre’s deficit targets would’ve also gone out of the window and force it to increase rates just to increase the revenue defeating the purpose of the reform.

Many experts said the centre will have to compensate many states. They were speaking from experience. They had data on their side. As the PRS research showed, between 2005-06 to 2015-16, while the average tax revenue of states grew at a pace of 15 per cent, the same between 2011-12 to 2015-16 was 9 per cent, meaning the growth rate was fabulous in the first half of the period under consideration.

Ideally, the centre shouldn’t have promised the states guaranteed compensation in case their tax growth rate fell below 14 per cent when they were merely increasing their tax kitties at 9 per cent in preceding years (on average). Moreover, it shouldn’t have promised a single average tax growth rate of 14 per cent for all the states when some states like Tamil Nadu were barely expanding tax base at 4 per cent while states like Bihar were doing so at 16 per cent.

But the centre went ahead and acquiesced because it didn’t want to wait for ideal GST that may never come. And for precisely this reason, Modi-Jaitley succeeded where P Chidambaram failed. Nonetheless, it was a big gamble, even if a well calculated one. And the data so far shows that this has paid off.

While the apprehension was that most of the states will need to be compensated, GST collection figures for various states now show that most of the states would in fact not need any compensation. A report released recently by the economists at State Bank of India (SBI) research centre analysed revenues of 24 states and that 16 out of them have increased their revenues over and above of 14 per cent mutually accepted minimum tax growth rate. On aggregate, the report finds, states gained Rs 18,698 crore in revenue in eight months of last fiscal.

Haryana (tax growth rate 31 per cent), Jharkhand (27 per cent), Punjab (23 per cent), Telangana (23 per cent), Chhattisgarh (21 per cent) and Maharashtra (19 per cent) were some of the biggest gainers under the new regime and earned an additional revenue of Rs 8,818 crore, Rs 5,233 crore, Rs 4,361 crore, Rs 6,939 crore, Rs 3,343 crore and Rs 9,501 crore respectively.

Nine states that couldn’t achieve the 14 per cent baseline tax growth rate are: Karnataka (loss of Rs 10,521 crore), Uttar Pradesh (Rs 7,069 crore), Madhya Pradesh (Rs 6,141 crore), Assam (Rs 4,687 crore), Himachal Pradesh (Rs 3,159 crore), West Bengal (Rs 1,940 crore), Tamil Nadu (Rs 175 crore), Odisha (Rs 617 crore) and Goa (Rs 98 crore).

As one can see, except Karnataka, Uttar Pradesh, Madhya Pradesh, Assam and Himachal Pradesh, loss accrued due to lower growth for other states isn’t substantial. We must also take into account the fact that these figures are only for eight months, from July to February (March figures are excluded).

To make up for losses of the states as in the above case, the centre had levied a compensation cess which amounted to Rs 62,000 crore and this is expected to soar to Rs 90,000 crore in the current fiscal. For last fiscal, out of Rs 62,000 crore, only Rs 41,000 crore has been given by the centre to states as compensation. Going by figures on revenue loss, the centre may end up saving some of the amount from the compensation kitty, leaving room for relaxation in cess levied on luxury and sin products.

All in all, the centre can heave a big sigh of relief. It has passed the GST’s biggest test with flying colours. Now, it can focus on increasing compliance and making it more and more of a simple and good tax.

Also Read: One Year Of GST, India’s Biggest Tax Reform To Date