Reassigning of Goods and Services Tax (GST) to States

In News

• The Union government needs to reassign Goods and Services Tax (GST) to States to address fiscal imbalance between the Union and State governments.

About

• Major Economic Changes in Recent Past: 
  • The divisible taxes of the Union government expanded from two to all the Union taxes, thus enlarging the revenue base to be shared with the States. 
  • Fiscal responsibility legislation was implemented to constrain the fiscal deficits of the States. States directly borrow from the market subject to limits imposed by the Union government. 
  • The Union Planning Commission was dissolved, leading to the withdrawal of Plan grants. 
  • GST was introduced in 2017. 
• Concerns:
  • These changes have considerably altered the States’ revenue structure. 
  • States have little revenue autonomy and are more dependent on the Union government. 
  • The vertical fiscal imbalance (VFI) ratio increased to 0.594 from 0.530, indicating that only 40% of the State’s own expenditure is financed by their own revenue.

Goods and Services Tax (GST)

• About:
  • The GST is a harmonised tax on commodities across the country. 
  • Individual States have little power to unilaterally change this tax. 
• Dual Structure:
  • The Union and State governments concurrently levy GST on commodities with 50% as Central GST (CGST) and 50% as State GST (SGST). 
  • There is an Integrated GST (IGST) on inter-State trade, so that 50% of it goes to the final destination State. 

Challenges

• Disparity Amongst Centre & States:
  • The Union government is endowed with more tax powers than the States, while the States are assigned more expenditure responsibilities than the Union government. 
  • This gives rise to a vertical fiscal imbalance (VFI) between the Union and State governments.
  • The unequal tax base with unequal expenditure requirements between the States creates horizontal fiscal imbalance among the States. 
• Increasing vertical fiscal imbalance (VFI):
  • For the last three Finance Commissions (2005-06 to 2020-21), the VFI ratio shows an increasing trend. 
  • For the latest period of 2015-16 to 2020-21, the ratio was 0.530, which means that only 47% of the States’ own expenditure was financed by their own revenue in that period. 
• Veto for Union Government:
  • The GST Council gives the Union government a veto to thrust its preferences on the States.

Way Ahead

• Reassigning of Tax Powers:
  • The Union government has exclusive power to levy excise duty on petroleum products, and the States have exclusive power to levy excise duty and sales tax on liquor. All other commodities fall under the GST. 
  • The CGST and the excise duty on petroleum products could be assigned to the States so that the entire GST is assigned to the States.
  • There is a need to bring all commodities, including petroleum products, under GST. 
• Harmonisation of GST:
  • The Union government should continue to collect IGST only to settle revenue on a destination basis. 
  • This will ensure harmonisation of GST across States. GST shall continue as a tax determined by the GST Council. 
  • Commodity taxation should be moved to State List II of the Seventh Schedule of the Constitution, with a rider that harmonisation of commodity taxation should be maintained.
• Removing Veto Power of the Union government:
  • The veto power of the Union government should be removed. 
  • Then, the GST Council will truly become a body by the States to settle tax issues among themselves, with the Union government facilitating the arrival of consensus among the States on tax issues. 
  • This may once again require some constitutional amendments. 
• Benefits of Reassignment:
  • The assignment of excise duty on petroleum products to the States will hasten the process of integrating taxes on petroleum products into GST and remove the cascading effects of the current excise duty on petroleum products. 
  • This will reduce the tax potential of the States, but higher buoyancy of GST should compensate for this revenue loss. 
  • The positive aspect of this reassignment of tax will be the increase in the tax revenue of the States. 
  • This will also improve accountability of the States to their people on fiscal matters.
• Addressing horizontal fiscal inequality:

• The Union government should effect equalisation transfers to address the issue of horizontal fiscal inequality. 
• The revenue surplus of the Union government after this tax reassignment should be enough to provide for this equalisation transfer to the States.

Source: TH