Cooperative Federalism in a Casualty | UPSC

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IASbhai Daily Editorial Hunt | 19th Sep 2020

Don’t wish it were easier. Wish you were better.– Jim Rohn

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 #145 :“Cooperative Federalism in a Casualty | UPSC

Cooperative Federalism in a Casualty | UPSC

Arun Kumar
Cooperative Federalism in a Casualty | UPSC

Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, and the author of ‘Ground Scorching Tax’

      HEADLINES:

On the GST issue, the Centre holds the baton

      CENTRAL THEME:

A large borrowing programme is inevitable; data and economic uncertainties show that States cannot handle the matter

SYLLABUS COVERED: GS 2: 3 : Taxation

      MAINS QUESTION:

A massive borrowing is inevitable with States in the grip of pandemic . Explain the different shortfalls and a plan of revival -(GS 3)

      LEARNING: 

  • Revenue Collection
  • Current Taxation Regime
  • Way Forward

      INTRODUCTION: 

GST Council meeting has now been deferred to the first week of October due to sharp disagreement between the States and the Centre

  • REVENUE SHORTFALL : The result of the unprecedented revenue shortfall faced by them.
  • FISCAL DEFICIT : By July-end, the Centre’s fiscal deficit had reached ₹8.2-lakh crore.
  • STATS : The fiscal deficit is 103% of the full year’s target and 15.23% of the lower GDP.
  • STATES POCKETS : The States face a similar grim  situation.

      BODY: 

THE TAXATION VOW

  • PROMISING NOTES : The Centre had brought the States on board GST by promising higher revenue collection.
  • SCEPTICAL VIEW : Producing States such as Gujarat in dilemma  because GST (last point tax) which is collected proportionately more in consuming States such as Bihar.
  • GROWTH BOND : States were lured by the promise of 14% annual growth in GST revenue over the base year of 2015-16.
  • INSUFFICIENCY : Any shortfall from this (for five years) was to be compensated by levying a cess on luxury and sin goods.

States have been reminding the Centre of this promise of compensation for five years.

  • THE DAY : Because of the slowdown in the economy and a shortfall in revenues, the transfer to States was finally made by July 2020.
  • RETAINED TRANSFER : The transfers due since April 2020 have been withheld.

TWO CHOICES

In the last GST Council meeting held on August 27, the Centre gave the States two options.

  • FIRST OPTION :  They could borrow ₹97,000 crore (the shortfall in the GST revenue compensation) from the Reserve Bank of India (RBI) under a special window at a low rate of interest.
  • SECOND OPTION : Borrow ₹2.35-lakh crore (the total compensation shortfall) from the market with the RBI facilitating it.
  • REIMBURSEMENT : The burden of repayment would be borne by the future collections from the compensation cess.
  • DEBT REPAYMENT : It was proposed that this cess which was to end in June 2022 could be extended to facilitate the repayment of the debt.

Clearly, the States are left on their own .

BUDGETARY CALCULATIONS

  • ANNUAL BUDGET GROWTH : The Union Budget presented on February 1, 2020 assumed a nominal growth of 10%.
  • CONTRACTION : Economy is still at around 60% of last year’s level, very optimistically it is likely to contract for the year 2020-21 by at least 10%.
  • SHORTFALL : So, optimistically, budgetary calculations will be off by at least 20%.Revenue will fall by much more than 20%.
  • E-COMMERCE AND MSME : Some sectors such as fast-moving consumer goods, or FMCG, and e-commerce will do well.
  • CORPORATES : Companies in sectors such as airlines, hotels and consumer durables will show losses and, therefore, pay little tax.
  • URBAN DEVELOPMENT : Corporation tax collection will fall sharply — much more than 20% compared to the budget estimate.

Income tax collection will fall since a large number of workers have lost employment and/or have faced salary cuts.

  • TAX TO GDP RATIO : The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.
  • STATES DEFICIT : The States’ share of all taxes collected by the Centre is 42%, so they will lose ₹2-lakh crore.

GREATER SHORTFALL

  • SCANTY COLLECTION : GST collection will also be short by much more than 20%.
  • MANUFACTURING SECTOR : The production of luxury and sin goods has been severely impacted and they pay the high rate of tax — 18%, 28% and cess on top.
  • DECLINING IMPORTS : Due to a drastic fall in imports, the Integrated Goods and Services Tax (IGST) and customs duties will also decline.

The extra tax collected on petroleum products will help counter the decline to an extent.

  • INDIRECT TAX TO GDP : Consequently, the indirect tax/GDP ratio can be expected to fall from 10.5% to 8% resulting in a drop of ₹7 lakh crore.

      IASbhai Windup: 

  • ESTIMATED SHORTFALL : The States’ GST shortfall would be about ₹2.1-lakh crore. On top of this, they will lose 42% of the shortfall in the Centre’s collection — so another ₹88,000 crore.
  • TAX COLLECTION 2021 : If the economy declines by only 10%, the total tax collection will be down by about ₹12-lakh crore in 2020-21.

It is predicted that the economy will be down by much more than 10% used in the calculations above, the revenue shortfall is likely to be far greater.

  • MASSIVE BORROWING : This points to the dire position of the Centre (and the States) and the inevitability of a large borrowing programme.

Only the Centre is in a position to do such massive borrowing.

       SOURCES:   THE HINDU EDITORIAL HUNT | Cooperative Federalism in a Casualty | UPSC

 

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