Cabinet nod:Moth-eaten GST Bill is better than no GST at all, kudos to FM Jaitley

Half a loaf, they say, is better than no loaf at all. It would have been good for the Indian economy if states and centre had agreed to an all-encompassing goods and services tax (GST) that subsumes all central and state levies, but it appears that pragmatism and federalism triumphed.

According to reports, the GST bill, which Finance Minister Arun Jaitley wants to introduce in this session of parliament, may exclude petroleum products, which are major sources of revenue for states. Though central government officials say this is only a temporary exclusion, state officials seemed to indicate that they have not agreed to put petro-goods back in the GST kitty at a later date.

Clearly, states have clawed back some degree of revenue autonomy by keeping petroleum out. Maybe for a long time.

On the other hand, The Indian Express reports that the finance ministry has agreed to compensate states for any loss of revenues in the first three years after the introduction of GST, and maybe for two years more, if the revenue shortfall continues. The compensation could be full for three years, and partial after that.

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If agreement is finally reached on GST, it would mean forward movement on an issue in which states and centre have struggled for over five years now. GST needs a constitutional amendment passed with a two-thirds majority by both houses of parliament and at least 15 states. Agreement has always seemed round the corner, but at the last minute has proved elusive so far.

But there appears to have been fresh forward movement from last week, when Jaitley said he would pay states a compensation of Rs 34,000 crore (over three years) for the loss of revenues when the latter had agreed to cut the central sales tax some years ago.

As we noted before, states had agreed to a one percent reduction in CST when introducing value-added tax (VAT) at the state level. The centre had asked them to make good this loss by raising their VAT rate, but the states saw no point in raising VAT further when inflation was already raging in 2008, and a hike in VAT would have worsened prices. Instead, they asked the centre to pick up the bill. Some states had anyway jacked up VAT rates and the centre argued that since they had done so, they could not claim compensation

Jaitley's promise on CST and compensation for future revenue loss is thus vital to rescuing the GST deal.

But is a moth-eaten GST worth the effort? It is. The National Council of Applied Economic Research (NCAER) has estimated that the introduction of GST could push up GDP rates by between 0.9-1.7 percent, depending on how comprehensive the GST turns out to be.

That kind of growth surge is clearly worth having, but, as indicated earlier, it comes at the cost of revenue federalism. GST is inherently anti-federal, as it reduces revenue flexibility for states.

With petroleum out of GST, the GDP gains may be lower even though states get greater revenue flexibility. But even small gains in GDP are better than no gains at all.

States can, meanwhile, expect another gain from the report of the 14th finance commission headed by YV Reddy, which has submitted its report to the government. Most finance commissions have increased revenues for states, and Reddy’s is unlikely to be different. It could make the movement towards GST smoother. In all probability, the commission will recommend a greater devolution of revenues to states from the next year.

Under the constitution, the centre has to set up Finance Commissions every five years to decide on the sharing of central revenues with states. The last commission was set up under Vijay Kelkar, who was also the author of the GST proposal in the last decade.

If the GST deal finally sees the light of day, it would be kudos to Arun Jaitley. Now, if only Modi can get the Sadhvis, Yogi Adityanaths and Sakshi Maharajs to stop blabbering, he can actually get the bill through.