GST: Better performing states may get sops – Times of India
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NEW DELHI: When the all-powerful GST Council meets in Lucknow on Friday, the Centre will present options for a compensation formula for states from next July, when the current regime assuring 14% annual growth ends.
But a one-size-fits-all approach may not be the new mantra to decide the compensation formula, with officials suggesting that it should be graded and incentivised for those putting in extra effort to improve compliance and collections.
By all accounts, at least a dozen states have failed to show any initiative to increase collections, a key issue that Nirmala Sitharaman and her team in the finance ministry are going to factor in, while proposing a new mechanism to state finance ministers.
The pre-pandemic experience in state GST revenues have shown wide variation and the 15th Finance Commission had pointed to it. “The assurance of 14% growth rate for five years, by treating all the states on par in terms of GST revenue growth, irrespective of their wide ranging revenue growth experiences in the past, has created another significant complication in federal finance,” it noted in its report.
There is recognition that some of the states, such Himachal Pradesh, Uttarakhand, J&K and those in the Northeast may need a helping hand as Central Sales Tax was a key source of revenue. Although the Northeastern states such as Arunachal Pradesh and Nagaland have seen high growth rates in recent months, officials concede that some of it will taper off, given that the rise is over small bases. “They did not have the requisite administrative set up in the VAT days, which is now in place and is helping them with collections,” an officer explained.
In contrast, it has been noticed that some of the states have been lax with collection initiatives, going to the extent of reducing the enforcement setup, often a deterrent for tax evaders.
While states have been claiming that the design is flawed and that there are implementation issues, officers at the Centre counter that argument. “There is a wide variation between states, which is entirely about how you address the issue of evasion and enforcement,” said an officer. While the new formula is debated in Lucknow, what is clear is that consumers will have to cough up the cess for several more years to ensure that states “don’t fall off the cliff ” once the current compensation regime ends in June.
But a one-size-fits-all approach may not be the new mantra to decide the compensation formula, with officials suggesting that it should be graded and incentivised for those putting in extra effort to improve compliance and collections.
By all accounts, at least a dozen states have failed to show any initiative to increase collections, a key issue that Nirmala Sitharaman and her team in the finance ministry are going to factor in, while proposing a new mechanism to state finance ministers.
The pre-pandemic experience in state GST revenues have shown wide variation and the 15th Finance Commission had pointed to it. “The assurance of 14% growth rate for five years, by treating all the states on par in terms of GST revenue growth, irrespective of their wide ranging revenue growth experiences in the past, has created another significant complication in federal finance,” it noted in its report.
There is recognition that some of the states, such Himachal Pradesh, Uttarakhand, J&K and those in the Northeast may need a helping hand as Central Sales Tax was a key source of revenue. Although the Northeastern states such as Arunachal Pradesh and Nagaland have seen high growth rates in recent months, officials concede that some of it will taper off, given that the rise is over small bases. “They did not have the requisite administrative set up in the VAT days, which is now in place and is helping them with collections,” an officer explained.
In contrast, it has been noticed that some of the states have been lax with collection initiatives, going to the extent of reducing the enforcement setup, often a deterrent for tax evaders.
While states have been claiming that the design is flawed and that there are implementation issues, officers at the Centre counter that argument. “There is a wide variation between states, which is entirely about how you address the issue of evasion and enforcement,” said an officer. While the new formula is debated in Lucknow, what is clear is that consumers will have to cough up the cess for several more years to ensure that states “don’t fall off the cliff ” once the current compensation regime ends in June.
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