Why in News?
At a time when most nations have suspended regular safeguards to expedite responding to Covid-19, the Goods and Services Tax (GST) Council in India is still engaged in a “discussion” on whether life-saving and hard-to-come-by products should be taxed.
Syllabus—GS2: Issues related to Federalism
- In these tough times, when most of the nations have suspended regular safeguards to expedite COVID-19 response, But in India GST council still engaged in the discussion of whether or not life-saving products taxed.
- A consensus on a 0% GST rate on products essential to fight COVID-19 remained elusive at the Council meeting.
- Because some members/states argued for a continued tax on such products which explains distorted design & incentive GST structure that results in lack of compassion.
Issues with GST:
- The council has 31 States’ representation.
- The taxes under GST are accumulated by the Union govt from states & a portion is transferred back to each state under a formula.
- The union govt transfers (includes a share of tax collected & union grants)
- There is a large imbalance in the collection & distribution of taxes between states under GST.
- Four states- Maharashtra, Tamil Nadu, Karnataka & Gujarat contribute 45% while the remaining 27 states contribute rest.
- Only 30% of the overall revenue of these 4 states comes from the union govt, while for the remaining 27 states nearly 60% of their revenues are obtained through union govt transfers.
- For Northeastern states, the share is 80-90% of their total revenues.
- This showcases that states that contribute the most to the GST pool are the least dependent on Union govt transfers while the least contributed states are the most dependent.
- Though the revenue share imbalance is characteristic of most federal govts but in India there are two unique problems.
- The long-standing problem is that such net transfers have become increasingly one-sided.
- Generally, net transfers work to reduce the developmental differences between states over time
- That means, as the states become more equal, the quantum of net transfers diminishes.
- The above problem has been greatly exacerbated in the last 7 years problem through two actions:
Union govt has reconstructed the composition of taxation away from the fair & progressive channel of direct taxation towards the inherently regressive & unfair channel of indirect taxes.
- It got further aggravated when Union shifted a large proportion of taxation into cesses that remained outside the GST pool.
Which do not have to be shared with the states.
- Since 2014, the cess revenues grew 21% every year leading to a doubling in terms of its share of GDP.
- The combined effect of the problems resulted in a lower share of overall revenues to states & an ever-increasing disparity in the net transfers by the Union.
- In this scenario, the one state one vote model regardless of the state’s size or its GST contribution causes further grave injustice.
- This model that has been established to incentivize states has been proven to be distortionary.
- The states the more dependent on Union transfers want to maximize GST collections while others want to be more sensitive to the citizen.
- The issue of COVID products taxes shows the starkest instances of differences.
- Where most states large states are ready to forego this tax revenue for humanitarian considerations, while others seem to continue to levy GST on COVID products.
- The issue is not about a small state’s rights issue but it is about people needs & aspirations in a democracy.
- When the direct tax policy decisions are legislated by parliament that has proportional representation from states, there is a need for similar proportional representation under the GST structure rather than one state one vote.
- The proportional representation of voting in the GST council is the need of the hour, because in this situations that would have been made COVID products tax free.
Like other federal states, In India, the Union should play the role of the fair arbiter. Comment