Govt revenues have collapsed and won’t return to normal anytime soon but raising taxes would be unwarranted

The Goods and Services Tax (GST) regime introduced by the Narendra Modi Government has, despite its many flaws, made life a lot easier for consumers and producers, who now have to deal with one particular rate instead of multiple ones. However, in the aftermath of the Coronavirus-induced economic malaise, we might get to see another aspect of having one tax, the collections of which are managed by the Centre and further distributed to States. With the latter actively cribbing about not receiving their due compensation from the Centre, expect the coming GST Council meet to be a fiery one, particularly with the political scene heating up. With the extended deadline for filing returns and dismal collections because of the lockdowns, the Government has not released collection figures for April and May. However, States will have to be paid their compensation for the revenue loss due to GST implementation. It is almost certain that the guaranteed 14 per cent cover for any revenue loss annually, promised during the GST rollout, might not be paid either this fiscal, or actually any fiscal till 2022, thanks to the economic slowdown unless the Centre absorbs some of the loss. The States are clearly in a quandary as most of them are battling the worst of COVID-19 spirals amid a collapsing health infrastructure. It is to assuage some anxieties that the Centre last week released compensation worth Rs 36,400 crore to States for three months up to February 2020. Besides dwindling cess collection in the compensation fund, the dependency of States on the promised GST compensation amid sharp fall in their own revenues due to the COVID-19 pandemic has further led to hardened positions.

Raising GST rates might seem like an easy way to generate funds but it might have the horrible effect of killing whatever little remains of consumer sentiment. Indeed, several industries have appealed to the powers that be that there should be a relaxation in taxes and not an increase in order to boost near-term consumer demand. The federal structure of the GST Council also makes it difficult for either the Centre or any State to act independently, yet the GST Council should resist the urge to increase taxes and should look at other avenues to raise money from the market, including the possibility of issuing bonds that even ordinary citizens could buy into. Some suggestions for payment of compensation  cess from the Consolidated Fund of India or through market borrowings were, in fact, floated at the last GST Council session in March but a decision has been hanging fire since. In fact, the provision was made by then Finance Minister Arun Jaitley. He had assured that “compensation to States shall be paid for five years in full within the stipulated period of five years and, in case the amount in the GST Compensation Fund fell short of the compensation payable, the GST Council shall decide the mode of raising additional resources, including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years.” The Coronavirus has dealt a big blow to the economy but growth will resume. Predictions for the monsoons are positive and it is likely that the second half of the year will see a revival of demand. The GST Council has to resist any punitive short-term measures. It is difficult for the Government machinery to live with less but the solution to the hell the pandemic has wrought in India is not to squeeze the already suffering Indian consumer. Innovative solutions will have to be found on how to raise funds and even past decisions cast in stone might need revision. Depending on the mythical foreign investor to come and save the economy is not a substitute for a real plan.