Co-operative Federalism and GST regime | UPSC

IASbhai Daily Editorial Hunt | 15th May 2020

The most common way people give up their power is by thinking they don’t have any.– Alice Walker

Dear Aspirants
IASbhai Editorial Hunt is an initiative to dilute major Editorials of leading Newspapers in India which are most relevant to UPSC preparation –‘THE HINDU, LIVEMINT , INDIAN EXPRESS’ and help millions of readers who find difficulty in answer writing and making notes everyday. Here we choose two editorials on daily basis and analyse them with respect to UPSC MAINS 2020.

EDITORIAL HUNT 80:“States cannot be left to the Centre’s mercy

       SOURCES:   THE HINDU EDITORIAL/EDITORIALS FOR UPSC CSE MAINS 2020

Edappadi K. Palaniswami

Praveen Chakravarty is a political economist and a senior office-bearer of the Congress party

 

      HEADLINES:

States cannot be left to the Centre’s mercy

      CENTRAL THEME:

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

SYLLABUS COVERED: GS 2:Co-operative Federalism : GST

      MAINS QUESTION:

“Co-operative federalism” has proved to be neither cooperative nor federalist in times of this crisis. Substantiate -(GS 2)

      LEARNING: 

  • Impact of alcohol on society .
  • How GST plays an important role in larger states .
  • States are feeling funding crunched at their doors of Delhi . Why ?

      INTRODUCTION: 

  • Karur MP S. Jothimani recently conducted a telephonic survey of 30 lakh people in Tamil Nadu on the re-opening of liquor shops in the State during lockdown 3.0.
  • An overwhelming 89% were opposed to the move.
  • The Maharashtra government too decided to permit liquor shops to open but was quickly forced to reverse its decision in some parts of the State following protests.
  • This may be largely due to fears of crowding and the consequent spread of COVID-19 rather than about alcoholism and its potentially deleterious societal impact.
  • Whatever may be the reason, it is clear that permitting the sale of alcohol during the lockdown is an unpopular move among the majority.

      BODY: 

A TRIPLE BLOW

  • It is apparent that financially broke State governments are forced to adopt desperate and reviled measures such as opening liquor shops to mobilise money for their fight against COVID-19.

The question is, even if they are strapped for resources, surely there must be other means to raise funds in this struggle to save lives than to prey on people’s alcohol addiction?

  • 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.
  • Most States raise resources through a combination of their own taxes and a share in the Centre’s taxes.

For richer States such as Maharashtra, Tamil Nadu, Gujarat, Delhi, Karnataka, Punjab, Haryana and Kerala, 70% or more of their revenue comes from taxes generated within their State boundaries.
 

  • REVENUE MAP : Nearly half of these were from the sale of goods and services within the State and the remaining half, from a combination of excise duties on petrol, electricity, alcohol, land registration fees, etc.
  • ADDITIONAL FUNDS : If a State had a natural disaster, they could raise additional resources for rehabilitation by raising sales tax rates on goods and services.
  • ECONOMIC EFFICIENCY : For the sake of GST, States sacrificed their fiscal powers in the promise of ‘economic efficiency’ and ‘tax buoyancy’, which never materialised.
  • SHARING TAXES : Under GST, States are legally entitled to their share of tax revenues collected in their State.
  • MINIMUM TAX REVENUE : 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.

So, how are they supposed to fight this health calamity with no money?

  • POWER AND MONEY : 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.
  • FEW OPPORTUNITIES LEFT : The other available options for States to raise funds are through taxes on sale of petroleum products, alcohol, lottery tickets, electricity, land or vehicle registration.
  • DEMAND DWINDLED  : During this extreme lockdown, demand for petroleum products, electricity, land and vehicles has dwindled substantially.
  • LAST OPTION : 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.
  • SHARE OF ALCOHOL : One could argue that alcohol consumption could even potentially increase during the lockdown and hence States have been tempted and coerced to resorting to raising monies from people’s alcohol habits.

Ironically, the States are being forced to rely on alcohol for resolving a health crisis.

  • BORROWING LIMITS ARE SET :  In order to do that, they need the Centre’s approval to raise their borrowing limit or to stand as guarantors.
  • INTEREST RATES : 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.

      IASbhai Windup: 

THE PRE-GST ERA

How would the States have handled this crisis in the pre-GST era?

  • SALE TAX : One, they would have had the funds raised through sales taxes to themselves and not be at the Centre’s mercy to release funds.
  • ESSENTIAL GOODS : They would have raised taxes on select essential goods sold in their States (say, mangoes or coconut oil) in accordance with their norms.
  • DEFAULT PAYMENTS : The Centre has defaulted on its financial obligations to the States at a critical juncture.

Democratically elected State governments cannot be expected to govern with no fiscal powers.

  • Five States account for half of all GST collections in the country.
  • It is time these bigger States challenge the very idea of GST.

The idea of ‘one nation, one tax’ is deeply flawed in an economically and politically divergent India.

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