23rd September 2024 (9 Topics)
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Why a grand GST bargain with states is needed
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Context
The discussion surrounding the Goods and Services Tax (GST) compensation cess is becoming prominent as the deadline for its current application approaches in March 2026. The GST Council is evaluating the future of this cess, which was originally implemented to compensate states for revenue losses. Recent financial reports indicate significant compensation disbursements and highlight the necessity for clarity on the cess’s role moving forward.
GST Compensation Mechanism
- Historical Context: The GST compensation mechanism was designed to protect states from revenue losses due to GST implementation, initially guaranteeing a 14% growth over 2015-16 revenues.
- Financial Transfers: From July 2017 to March 2023, the government disbursed Rs 8.8 trillion to states as compensation, with a significant concentration in ten large states like Maharashtra and Tamil Nadu.
- Loan Repayment Plan: The GST Council has proposed to repay the Rs 2.7 trillion compensation loan by January 2026, two months ahead of the cessation of the compensation period.
Future of the Compensation Cess
- Cess Relevance: With the original purpose of the GST compensation cess diminishing, there is a need to reassess its continuation beyond March 2026.
- Group of Ministers: The GST Council has recommended forming a Group of Ministers to evaluate the future of the compensation cess and potential uses for the surplus funds.
- Options for Revamping: Potential revamping of the cess could involve rebranding it as a green cess to fund environmental projects, aligning with India’s climate goals.
Implications of Taxing POL Products
- POL Products and GST: Petroleum, oils, and lubricants (POL) remain outside the GST framework, and including them could enable businesses to claim input tax credits, lowering operational costs.
- State Autonomy Concerns: Bringing POL products under GST would reduce state fiscal autonomy, as states currently enjoy flexibility in setting tax rates on these products.
- Need for a Grand Bargain: To encourage states to include POL products under GST, a compensation mechanism using cess proceeds could be necessary to mitigate any revenue losses.
Practice Question
Q. Critically analyze the implications of the GST compensation cess's future on state finances and the overall economic landscape in India, considering both the potential transition of petroleum products into the GST framework and the need for environmental funding.
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