IASbhai Daily Editorial Hunt | 19th Sep 2020
Don’t wish it were easier. Wish you were better.– Jim Rohn
EDITORIAL HUNT #145 :“Cooperative Federalism in a Casualty | UPSC“
Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, and the author of ‘Ground Scorching Tax’
On the GST issue, the Centre holds the baton
A large borrowing programme is inevitable; data and economic uncertainties show that States cannot handle the matter
SYLLABUS COVERED: GS 2: 3 : Taxation
A massive borrowing is inevitable with States in the grip of pandemic . Explain the different shortfalls and a plan of revival -(GS 3)
- Revenue Collection
- Current Taxation Regime
- Way Forward
- 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.
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.
- 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.
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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