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GST - Sparring over Compensation - Hybrid solution lies between selective tariff hike & borrowings!

TIOL - COB( WEB) - 726
AUG 27, 2020

By Shailendra Kumar, Founder Editor

FOR China, the pandemic COVID-19 has demonstrated to be much deadlier killing machine than any of its indigenously developed weapons could have instilled fear into its competitors for geopolitical mantle! For humanity, it has proven to be purgatory with the global death toll inching close to 8.4 lakhs! For close to 60,000 Indians, death indeed rode a fast camel! Worse, the collateral damage it has wreaked on the global economy is not only humongous but also without a parallel! With close to 33 lakh cases, India ranks third in the global tally of positive cases. The pandemic has ruthlessly wrenched the Indian economy to its nadir. And the economic stimulus injected so far, seems to have vapourised against the pandemic size of economic woes India has skidded into post-COVID-19! With the economy down in dumps, one predictable victim has been the Compensation kitty under the GST.

The Union of India has gallingly been failing in compensating the States for their revenue loss. Some of the State Finance Ministers have written to the Union Finance Minister, detailing litanies of their fiscal woes and how they are failing to pay full salary to their personnel, leave aside the much-needed public welfare schemes. Their gnawing revenue deficits range between 40% to 60%. And their only sliver of hope is tethered to the compensation kitty! In view of the swelling distress calls, the GST Council has called for its 41st meeting, dedicated to a single agenda item of compensation, today. It is learnt that more than seven States, including a couple of BJP-ruled ones, have penned bitterly-worded missives (no waffling, at all!) to the GST Council Chairperson. The Bihar Finance Minister, Mr Sushil Kumar Modi, is on record that the Centre is morally committed to compensate the States even if it boils down to borrowings. With frayed temper running high, the Council may witness some fireworks and political calisthenics before the 'marijuana' (Compensation solution) may calm them for some period! (Also see Cob(Web)-723)

What seems to have acted as a powerful ingredient stewing in the pot is the adverse Attorney General's legal opinion on the issue. The AG is learnt to have communicated that the Centre is under no obligation to pay compensation shortfall! The ball has been hurled back in the lap of GST Council which alone can decide on making good the shortfall by providing sufficient amount in the kitty. The AG is reported to have cooed that the Council may recommend to the Centre to allow States to borrow on the basis of future inflows in the compensation fund but the onus would lie on the Union of India under Article 293(3) of the Constitution.

The AG has provided plain interpretation of the constitutional provisions - compensation for loss of revenue on account of IMPLEMENTATION of GST. The Union of India is under no obligation to compensate on account of COVID-19 or economic slowdown or natural calamity because they have no direct nexus with the IMPLEMENTATION. The First Law Officer of the Union of India has also pointed out that the Parliament had binned in 2017 an amendment which had sought to put onus on the Centre to pay from its Consolidated Fund of India.

The AG's opinion has clearly delineated the boundaries for deliberations in the Council today. Now, the trickiest question is - how should the Council proceed? What options should be proposed on the floor? Given the dilapidated conditions of most of the sectors in the economy, expanding the ambit of Compensation Cess to more goods or perhaps services would be akin to pushing such sectors to a point where they may plead for euthanasia! The present time is certainly highly perilous for most sectors except for the 'sin goods'. If we analyse the basket of 'sin goods', the two goods which have qualified the threshold of 'untouchable' in the near future are the automobile and aerated drinks. This leaves two items - pan masala and tobacco. These two do enjoy high credentials of being serious threat to public health. They do owe allegiance to the clan of coronaviruses, figuratively, in terms of putting extra strain on public health infrastructure (smoking costs Rs 800 bn to the nation and kills over 16 lakhs annually). Stung by the impact of the pandemic on India's clunky health infrastructure, the Union of India is committed to overhaul it as per the Prime Minister's statement. And it is going to be eye-wateringly expensive. So, let pan masala and tobacco pay for it!

Numerous studies have also proven that sin taxes do make people healthier. They do change behaviour. Economists and even WHO have come to believe that a one per cent rise in prices of tobacco products is linked to a decline of about 0.5% in sales. That is another issue that ciggy biggies tend to absorb the rising costs by either reducing their own margins on low-cost products or extracting the same from luxury brands. India is a signatory to WHO Framework Convention on Tobacco Control and it calls for minimum 75% tax burden to curb rising consumption. Higher taxes not only garner extra revenue for the Exchequers but also reduce burden on public health system. Raising taxes would lead to increase in smuggling is the common refrain of pro-tobacco lobby but global studies have found that the rise in smuggling is less than 10% as compared to contraction in consumption. WHO has captured data from France, Turkey, Uruguay and many other countries which have begun to implement its six-point agenda of MPOWER Scheme, 2017.

Anti-tobacco organisations have represented to the Govt that if the GST Council raises the compensation cess as per the ceiling envisaged, it may generate close to Rs 50,000 Crore revenue. Though I am not sure about the quantum of revenue but any appreciable hike in the Cess rate would enrich the compensation kitty in the prevailing grim time. The Punjab Finance Minister has demanded that in place of specific rate, a way needs to be worked out for ad valorem which would be more realistic. I personally favour a hike in the tax rate on all tobacco products including bidis, so that India complies with the WHO suggested threshold of 75% tax and the Government could allocate more resources for public health.

Second option which the Council needs to work out is to, first, reduce the annual growth rate of 14% to 7% which would be more realistic and attainable. Once a consensus is arrived at such a rate, the Centre and the States may agree for extending the period of compensation from five years to eight years. This would provide comforting cushion to the sparring States and lesser burden on the economy too! Thirdly, the Council may recommend to the Union of India to allow States to borrow against the future receipts of compensation in the short-run. Or, if the Union of India is keen to avoid any allegation of backpedalling on its historic promise, it may access market and the debt-servicing can be done through the compensation fund! This appears to be more viable and less fracas-causing option as even the Centre also faces serious liquidity crunch in its direct as well as indirect tax kitties. States need to take a holistic view that like them, the Union of India is also grappling with the most critical fiscal slippage perils in the recent decades. Though political pyrotechnics cannot be wished away but given the average political wisdom of State Finance Ministers, a realistic solution to the compensation imbroglio appears to be lurking in the corner!

(Just prior to uploading this Column, I have come to know that the AG has changed his opinion and stated that the Union of India is obligated to pay!)