Floundering GST: An act of fraud

States gave up their own taxes and the VAT (Value Added Tax) regime in favour of the GST in 2017 because the Centre promised to compensate shortfalls in their revenue.

But barely three years later, a storm is brewing with the Centre flaunting the Attorney General’s opinion that the Centre is not legally bound to compensate the states. The ‘act of God’ had put enormous pressure on the Centre’s finances, they were told at the GST Council, and collection from the GST was also falling. The states, therefore, could take a walk.

To be fair, the Centre has offered them the option to borrow from the RBI or the market, either the entire shortfall of Rs 2.35 lakh Crore or Rs 97,000 Crore, which is calculated as the GST collection shortfall with the rest attributed to COVID effect. The Centre also explained that it was averse to borrow itself because that would place additional pressure on all stakeholders.

Opposition-ruled states have written to the Prime Minister seeking his intervention. Chief Ministers of Kerala and West Bengal, Pinarayi Vijayan and Mamata Banerjee, wrote to the PM asking him not to transfer GST compensation burden on to states. They also mentioned the dire straits of state finances due to a massive revenue shortfall. Earlier, the CMs of Delhi, Andhra Pradesh, Puducherry and Tamil Nadu had also written to the PM while the Chattisgarh CM had written to Finance Minister Nirmala Sitharaman. Besides, Punjab, Maharashtra and Rajasthan have also expressed their opposition.

Punjab finance minister Manpreet Singh Badal said in a letter to Union finance minister and GST Council chairperson Nirmala Sitharaman that both the borrowing options offered were a breach of the constitutional assurance of compensation to states. “We thus take both the options with great regret as a clear breach of the solemn and constitutional assurance by the central government. We believe this is a betrayal of the spirit of cooperative federalism that formed the backbone of the GST journey so far,” said Badal.

The move against the Centre’s two options to make good the shortfall of Rs 2.35 lakh crore was first initiated by Punjab, Chhattisgarh, West Bengal, Maharashtra, Rajasthan and Puducherry who, in a webinar convened by Congress President Sonia Gandhi, had rejected the two options given by the central government to bridge the GST Compensation gap.

“Now that we fully understand Centre’s intentions on GST compensation, we have no choice other than to reject them lock, stock, and barrel... No more surrender of states’ rights,” tweeted Kerala finance minister T.M. Thomas Isaac.

Kerala suggested a third option that entailed the Centre borrowing the full amount on their behalf and the states extending the cess to recoup the amount. The states have also toyed with the option of approaching the Supreme Court but want to first exhaust the political options of approaching the PM as well as discussing the issue again at the next GST Council meeting on September 19.

States find themselves in a Catch-22 situation because unlike the Union Government, they cannot dip into the reserves of the Reserve Bank of India or share in its profits. Nor can they raise revenue by disinvesting government owned companies. They cannot borrow internationally either. And if they do, the interest payment might threaten to sink them further.

Ironically, if the states float bonds and borrow from PSU banks which buy them, the interest paid by the states would inflate the revenue of the PSU banks and by extension the Centre.

There is a strong case, therefore, for the Centre, which has greater revenue raising powers, to borrow. It has been also suggested that the RBI provide the states interest free advance to overcome the shortfall while the Government explores how the states can raise revenue.

West Bengal chief minister Amit Mitra had last year raised the issue of fraud by companies evading GST. The fraud could have eaten away as much as Rupees one lakh Crore every year since 2017, he had suggested. The basis was a reply given to Parliament by the minister of state for finance Anurag Thakur that tax fraud of Rs 45,682 Crore had been detected under GST.

“In fact, this massive fraud under GST is understated, as complete data of frauds under state GST (SFST) have not been factored in. If the detected and undetected cases of tax fraud of all states under SGST are compiled, then the tax evasion figure may cross Rs 1 lakh crore,” Mitra wrote in a letter to the finance minister last year. “In fact, this massive fraud under GST is understated, as complete data of frauds under state GST (SFST) have not been factored in. If the detected and undetected cases of tax fraud of all states under SGST are compiled, then the tax evasion figure may cross Rs 1 lakh crore,” he added while urging to put in place ‘a robust reporting system’ to generate real time tax alerts on detection of any suspicious and fraudulent transaction going forward.

But even as the storm brews, states have begun to sniff a political agenda. By wrecking the finances of states and destroying their revenue raising ability, they suspect, the Centre wants to politically bring them on their knees and fall in line. Federalism and states’ autonomy, they believe, are at stake.