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Will ‘Act Of God’ Derail The One Nation, One Tax Regime?

BJP-ruled Karnataka has become the first state to pick one of the two options to borrow money and make up for the loss incurred due to the denial of its just dues of the Goods and Services Tax (GST) from the Centre.

But the apprehension is that the denial of the GST could be the first step towards the collapse of the One Nation, One Tax regime, conceptualised by the Congress-led coalition government and hastily implemented by the BJP-led government at the Centre.

The lead taken by Karnataka comes in the wake of at least six states opposing the bait thrown by the Centre. The finance ministers of non-BJP ruled states of Kerala, Telangana, Punjab, Delhi, West Bengal and Chhattisgarh have already discussed the issue and flatly refused to accept the Centre’s options.

The chief minister of Tamil Nadu Edapadi Palaniswamy has also written to the Prime Minister, opposing the move like his counterparts from Kerala and West Bengal.

The situation faced by Karnataka is not different from what is faced by other states due to the undue delay in the payment of arrears of GST by the Centre. The Centre has calculated that the total amount it needs to pay the states by way of compensation is Rs 97,000 crore.

The Centre has made it clear that it cannot pay and has, instead, asked the states to accept one of the two choices to raise resources in lieu of those arrears. This was the meeting where the Union Finance Minister Nirmala Sitharaman attributed the pandemic to an ‘Act of God.’

Karnataka’s Preference

Karnataka has chosen an option by which it has accepted a lower compensation because it does not have to pay interest for the entire loan amount as offered in the second option. It has preferred the first option in which it is eligible for Rs 18,289 crore out of which Rs 6,965 crore would come from the Cess collected.

“For the remaining amount of Rs 11,324 crore, Karnataka would be able to borrow through a special window with the entire burden of principal and interest repayment being met out of the Compensation Cess fund in the future. Further an additional borrowing up to 1% of the Gross State Domestic Product or GSDP, which is Rs 18,036 crore, will be available unconditionally and another 1% borrowing can be done linked to certain reforms as earlier suggested by the Government of India. These borrowings can be carried forward to the next financial year, if necessary,” a government statement said.

Under the second option, Karnataka would be eligible for a compensation of Rs 25,508 crore. Out of the total compensation, Rs 6965 crore would come from the Cess collected. For the remaining amount of Rs 18,543 crore, the state would be allowed to borrow through an issue of market debt.

“However in this option, unconditional borrowing of 1% of the GSDP will not be separately available to the state. As a result, the net borrowing of the state will reduce substantially by an amount of Rs 10,817 crore. Further, the state will have to pay the borrowing through issue of market debt which shall be paid by the state from its own resources,” the statement said after a meeting chaired by chief minister BS Yediyurappa.

Karnataka’s Justification

In short, Karnataka has preferred to lose Rs 7,217 crore by choosing the first option rather than pay interest on Rs 18,543 crore.

A senior finance department official told The Lede: “If it is assumed that tax collection will be 10% less than last year due to COVID-19, then the requirement could be Rs 25,508 crore or so. But we don’t know the real collection at the end of the year.”

How Do Economists See This Development?

Like good lawyers, economists also differ, but they all express apprehensions about the long term impact of the Centre’s decision in not fulfilling its “Constitutional duties.”

“The issue is who will take the risk of repayment. The point is that under the law, the Centre has to pay the states for five years. Now the Centre is saying it will not pay. So how do the states repay? Once repayment starts, the states can also turn around and say that we can also impose indirect taxes that currently come under the GST. The moment that happens, the Centre gets weakened and the GST collapses. I think, it is the first step towards the collapse of the GST,” Professor Narender Pani of the National Institute of Advanced Studies (NIAS), told The Lede.

Professor S Janakarajan, formerly of the Madras Institute of Development Studies, is perplexed by the Centre’s approach. “The Government of India means it is a Union of states. Its main responsibility is to protect the states. By imposing these two options, why should states borrow when their dues are with the Government of India? This is something ridiculous.”

But, Professor RS Deshpande, former Director of the Institute for Social and Economic Change (ISEC) differs with the opinions of both Professors Pani and Janakarajan. “It would have been better if Karnataka had chosen the second option. But the states should be made to borrow and they should be responsible for repayment. The Centre, on its part, should pay the GST arrears during a stipulated time frame,” Professor Deshpande told The Lede.

Implications Of The Centre’s Decision?

Said Professor Janakarajan: “The implications are huge. The states will not be able to perform as welfare states and fulfil their Constitutional obligations. Every state has its own problems, irrespective of party affiliation. Let us take the current situation. We are in the Unlock situation after the lockdown. We are very soon going to see a huge spike in COVID cases. Do we have a plan to manage it? Do we have a plan to safely dispose the PPE suits? Are we going to emulate Italy? How are the states going to manage resources for tackling this problem?”

Janakarajan disagreed with Professor Pani that the GST will collapse. He pointed out that the major contribution to the GST goes from the southern states and the western states of Maharashtra and Gujarat. “If we go back to VAT, states like Karnataka and Tamil Nadu will benefit. The states will benefit and not the Centre. States like Uttar Pradesh and Bihar, where the VAT regime is low, will stand to lose. Because of GST, a lot of redistribution of resources is taking place now.”

Professor Deshpande does not think it is possible to go back to the VAT regime. “It will lead to chaos with both the states and the Centre facing heavy losses. GST has been conceptualised by economists of very high calibre. Dr Manmohan Singh accepted it wholeheartedly. GST brings stability. If a commodity produced in Gurgaon has to reach Bengaluru, under the VAT regime, it would be taxed seven times. That era has gone.”

Political Response

Krishna Byre Gowda, Congress leader and former minister who represented Karnataka in the GST Council then chaired by late Arun Jaitely, told The Lede: “The real loss is of more than Rs 25,000 crore. Karnataka is forfeiting its rights for anything more than Rs 18,000 crore just because the state government cannot speak up against its party government at the Centre. The loss is being borne by the people of Karnataka due to lack of courage on the part of the state BJP leaders. This is what we get for giving the BJP 25 MPs from the state? This is stifling Karnataka.”


But Professor Deshpande has a proposition. “The Finance Minister cannot be left to tell the states to do this or that. The Chief Ministers must insist with the Prime Minister to call a meeting of the Inter-State Council as per the provision in the Constitution, discuss the issue and decide how the situation can be dealt with. It cannot happen with one or two chief ministers writing letters to the Prime Minister.”

At the same time, Professor Deshpande said: “Over the years, a deeper penetration of politicisation has taken place in decision making. We do not have people like Pranab Mukherjee or Professor Madhu Dandavate. Professor Dandavate, for instance, would criticise the party opposing him during the election. But once he got elected and became a Member of Parliament, he became apolitical and respected the opinion of others. This attitude is completely gone now.”

The Rs 97,000 crore question is: Will anyone think like Pranab Mukherjee or Professor Dandavate now in the interest of the welfare state?

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