States already have limited revenue options and limited resources. Ind...

  Jun 12, 2020

States already have limited revenue options and limited resources. India has federalism which expands to fiscal domain as well and hence States cannot be left to the Centre’s mercy. Discuss.

  1. It is apparent that financially broke State governments are forced to adopt desperate and reviled measures such as opening liquor shops to mobilise money for their fight against COVID-19. 
  2. The question is, even if they are strapped for resources, surely there must be other means to raise funds in this struggle to save lives than to prey on people’s alcohol addiction.
  3. Most States raise resources through a combination of their own taxes and a share in the Centre’s taxes. 
  4. Before GST, States were free to charge sales taxes as legislated by their State legislatures. If a State had a natural disaster, they could raise additional resources for rehabilitation by raising sales tax rates on goods and services.
  5. For the sake of GST, States sacrificed their fiscal powers in the promise of ‘economic efficiency’ and ‘tax buoyancy’, which never materialised. 
  6. Under GST, States are legally entitled to their share of tax revenues collected in their State. 
  7. But they are now reliant on the Centre to release these funds to them periodically. When the GST was enacted, States were also guaranteed a minimum tax revenue every year for a period of five years. In the midst of the current pandemic, the Centre has reneged on both these promises.
  8. This is a triple blow for the States — not being paid what they are owed, not being helped with additional resources, and bearing the brunt of the pandemic’s impact. 
  9. Can’t the States borrow money to tide over this crisis? In order to do that, they need the Centre’s approval to raise their borrowing limit or to stand as guarantors. 
  10. Since States do not have clear revenue visibility, the rates at which they can borrow are very high and their ability to borrow is severely undermined. 
  11. They are once again dependent on the Centre to borrow funds from the market and then release them to the States.
  12. The Centre has defaulted on its financial obligations to the States at a critical juncture. 
  13. The idea of ‘one nation, one tax’ is deeply flawed in an economically and politically divergent India
  14. The efficient functioning of a GST regime cannot be beholden to political party affiliations at the Centre and the States. 
  15. Democratically elected State governments cannot be expected to govern with no fiscal powers. It is time these bigger States challenge the very idea of GST.