Modi’s government turned the GST into a weapon for scheming states

The Goods and Services Tax (GST) is not an exotic animal. It is in effect in federal and unitary nation states. There are different models, but the basic principle is the same: a tax paid at one stage of the supply chain should be offset by the tax due at the next stage. There should be no tax on the tax.

MODVAT, then CENVAT (central VAT), were introduced to mitigate the impact of excise and tax on services. It worked well. States have been persuaded, through considerable effort, to adopt VAT (value added tax) to replace sales tax. CENVAT by central government and VAT by state governments operated independently in their own jurisdictions. However, there were unresolved issues in interstate sales and interstate services. There were also problems when, in the supply chain, a “service” was done at one stage and a “sale” was made at another stage. The answer was the GST, which would apply to all sales and services.

A task accomplished

Getting central government and state governments on the same page was a Herculean task. Among the issues that needed to be honored were:

  • that the hallmark of a sovereign was the power to levy taxes;
  • that the Indian Constitution was federal in nature and that the power of taxation was shared between the Center and the States;
  • that states were required to relinquish their exclusive power to tax the sale of goods, which was their main source of income;
  • that the distinction between large and small states was irrelevant;
  • that the fear of States of incurring loss of income should be allayed by guarantees of compensation and an enforceable mechanism for this purpose;
  • that shared sovereignty can only be practiced on the basis of mutual trust and respect; and
  • that if a rule on voting was needed, the most important unwritten rule would be that all decisions should be made on the basis of consensus and not along party lines.

Mr. Yashwant Sinha, the late Pranab Mukherjee and I have done our utmost to adhere to the above principles. Much like the late Arun Jaitley, although he slipped on initial tax rates. The meetings of the group of finance ministers who prepared the GST and the GST Council meetings, as Arun Jaitley chaired, went smoothly and without confrontation and moved the GST process forward – hesitantly. , but advanced nonetheless.

The breakdown

Enter Mrs. Nirmala Sitharaman. With each successive Council meeting, there have been only more conflicts, confrontations and, now, an almost complete breakdown of mutual trust and respect.

The constitutional provisions are clear. Section 246A empowers both Parliament and, except in the case of interstate trade or commerce, the State Legislature to collect the GST. On interstate transactions, Section 269A states that the GST “shall be collected by the Government of India and this tax shall be distributed between the Union and the states on the recommendations of the Goods and Services Tax Council”. Section 279A closes the loop by creating a GST Council, appointing the Union Minister of Finance as president, demanding the election of a vice-president, mandating the Council to make recommendations on all matters relating to to the GST, including taxes, duties and surcharges to be levied, authorizing the establishment of a dispute settlement mechanism and providing for a weighted voting system under which, it was believed, the Center could not override at the feet of the States.

Every key part of the GST Council has collapsed. No vice-president has been chosen since its creation in 2016. The GST Council did not meet for six months between October 2020 and April 2021. It was quietly (and effectively) sidelined by forming a committee of GST implementation comprised of agents who make “recommendations” that are turned into rules by the central government, bypassing the GST Council and state legislatures!

GST arming

Ahead of the 43rd GST Council Meeting, Mr. Manpreet Badal (FM, Punjab) pointed out the above issues and highlighted two urgent issues: reducing GST rates to facilitate treatment and management of Covid, and excessive delegation to the GST Implementation Committee. After the meeting, the Union Minister of Finance formed a committee of eight ministers to examine the GST rates related to Covid and, significantly, excluded the three states governed by Congress and other states that had argued strongly for a reduction in rates!

According to a letter dated June 4, 2021, from Dr Amit Mitra (FM, West Bengal) to Ms Sitharaman, the GST compensation owed to states until January 2021 was Rs 63,000 crore. The Punjab, Rajasthan and Chhattisgarh have claimed that their dues, until June 1, are respectively Rs 7,393 crore, Rs 4,635 crore and Rs 3,069 crore. Yet in a television interview on June 15, Ms. Sitharaman angrily refuted the interviewer and said “What dues, I cleared the GST dues from all states”!

Mr. Modi’s government turned the GST into a weapon for rebellious states. The GST Council has been reduced to a discussion workshop. Effective legislative power has been usurped by the GST Implementation Committee and the central government. GST contributions and compensation are withheld or delayed, reducing states to “begging” for funds from the central government.

God forbid, but the Modi government may be paving the way for an elegy for the GST.

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