From UPSC perspective, the following things are important :
Prelims level : GST Council
Mains level : GST council - consensus
GST Council departed from the consensual nature of decision-making followed so far. The council, for the first time, voted on an issue of the taxation of lotteries.
- The Kerala government stuck to its stance of maintaining the dual rate structure.
- The final decision to go to a vote illustrates a deterioration in relations between the Centre and states.
- It goes against the idea and spirit of cooperative federalism.
- This is unlikely to be a one-off.
- As GST revenues fall, relations between the Centre and states may be further strained. States are likely to press for extending the compensation period by a few years.
Reasons for the trust deficit
- Compensation – The genesis of the distrust stems from the Centre delaying compensation to states for their revenue loss.
- Under the GST regime, states have to be compensated if their revenue growth falls below 14% each year over the 2015-16 base year.
- So far, the practice had been to transfer the compensation amount after two months. The Centre delayed payments for August and September.
- The Centre released Rs 35,298 crore as compensation just prior to the council meeting, and the finance minister said that the Centre was committed to discharging its obligation.
- Economic slowdown – With the economy slowing sharply, there is a concern that the amount being collected through the compensation cess will not be enough to compensate for the shortfall in collections this year.
- Centre’s own revenues are likely to fall short of its budgeted target. Tax devolution to states will also be lower this year.
- Capital expenditure – Much of the states’ revenue expenditure is sticky in nature. Lower revenues will force them to cut back on capital spending. This will intensify slowdown.
- Some state governments have asked for relaxing the fiscal deficit limit to 4%.
- It underlines the severity of the stress in both Central and state government finances.
- Raise tax rates to shore up collections. Though rate rationalisation is required, in some sectors inputs are taxed at higher rates as compared to final products.
- Raising taxes when the economy is slowing down would have been counterproductive.
A comprehensive review of the GST architecture that addresses the issues flagged by the CAG is the need of the hour.