GST Council bites the bullet
Rate rationalisation is a sound move, but the Centre should keep an eye on inflation data
Decisions taken in the 47th Goods and Services Tax (GST) Council meeting are on expected lines. The five-year window for guaranteed revenue compensation to states, which was a part of the original federal agreement on GST, has not been extended. The Council has, even if only partially, accepted the recommendations of the empowered committee to begin GST rate rationalisation. Tax rates on some commodities have been increased and certain exemptions have been done away with. If the deliberations and decisions are any indication, one can expect more rate rationalisation and phasing out of exemptions in the next meeting. This newspaper has always held the view that unless these steps are taken, the original promise of Gst-driven reforms – a uniform but also simple indirect tax regime for the Indian economy – will not materialise.
While the argument might not be palatable to state governments, especially those ruled by the Opposition, phasing out the guaranteed compensation window was essential to align the incentives for rationalising GST. Now that states have a higher stake in growth of GST revenue, there will be lower resistance to raising tax rates. Politically motivated steps such as rate cuts or exemptions before elections have eroded the sanctity of the regime in the last five years. While there can be a debate on whether or not the rate rationalisation process should have waited for inflationary pressures to ease, it needs to be kept in mind that the politically driven progressive reduction in average weighted GST rates started at a time when inflation was not really a problem in the economy. Also, anybody who is opposing the rate rationalisation process on the pretext of inflationary pressures but asking for an extension of the guaranteed compensation period, is making a contradictory argument. The compensation awarded to states is also financed out of an additional cess and, therefore, inflationary in nature.
While the prospects of rationalisation are encouraging, the government, especially the Centre, should not lose sight of the other structural problems which plague India’s fiscal federalism framework. Now that the Union does not have to find resources to compensate states, it should do a serious rethink on reducing the share of cess and special duties in central taxes because these are not shared with the states. This is one of the biggest reasons for states receiving a much smaller share of central taxes than what is mandated by the Finance Commission. It is only with such reciprocity that India’s fiscal federalism will truly become cooperative in nature.