GST Consuming States look better off
The Goods and Services Tax (GST) has completed one year and a quarter and has thrown up some indicators to make assessment of the new system. The GST in India is unique in the sense that a lot of compromises have to be made to make it implementable in a federal country where the fiscal powers between the Centre and States are well defined.
Experts had many reservations on GST. It was believed that introduction GST would escalate the prices of commodities, at least in the first year of its implementation. Multiple tax rates would complicate the compliance.
Manufacturing States were of the view that they would lose revenue due to the destination principle in which tax goes to the State where the goods or services are consumed rather than where those are produced. A little more than a year’s experience has proved the contrary. First, GST did not result in inflation. The tax rates of goods and services under GST are fixed taking into account pre-GST incidence of taxes. For example, Excise Duty, Central Sales Tax, Entry Tax and VAT were collected on cement.
Taken together, a consumer paid 29 per cent during pre-GST period on cement. All these taxes are subsumed in GST and cement is taxable at 28 per cent under GST. Of course, one rate is ideal for GST, but considering the Indian conditions, multiple tax rates fixed under GST prove to be justified. In future, when GST stabilizes, the number of tax rates can be reduced. Second, the manufacturing States were not inclined towards the destination principle of GST. Central Sales Tax (CST) was collected by the producing State on inter-State transactions, but in GST, tax will be collected and transferred to the States of consumption on inter-State transactions.
The States like Tamil Nadu, Maharashtra, Gujarat, Odisha etc., had the grouse that they invest in infrastructure, create conditions in the State for investment that often cause pollution, but they would lose tax to other States.
But experience of more than one year has shown that the manufacturing States get comparatively more revenue under GST. Because the level of consumption of goods and services is high in those manufacturing States and the destination principle in GST helps them.
Constitution guarantees compensation for the loss, if any, to the States on account of introduction of GST for five years. The year 2015-16 is taken as the base year to calculate the protected revenue of a State and 14 per cent is assumed to be the growth rate.
The assumed growth rate is applied to the base year and the next each year’s revenue collection so arrived, to determine the protected revenue in a year. The shortfall between the protected revenue and the actual collection of a State is compensated.
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