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Today is the crucial meeting of the Goods and Services Tax (GST) Council. It may not be an exaggeration to claim that today's meeting could mark a milestone in the history of India's fiscal federalism and shape the future of Centre-State relations.
In 2017, the Centre made a promise to the States that a certain minimum amount of GST revenues will be guaranteed to every State for every year until 2022. GST was born in the cradle of this promise and hailed as a harbinger of 'cooperative federalism'. Now, there is not enough money in the GST kitty for the Centre to honour this obligation. The Centre has therefore proposed that the States should borrow money to bridge this gap and that it will act as a guarantor to facilitate this borrowing. Many States have accepted this proposal while many others have rejected it and implored the Centre to borrow. There is a bitter stand-off between the Centre and these protesting States.
This is further complicated by the recent revelation of the Comptroller and Auditor General, and explained by Professor Govinda Rao in the The HIndu, that in the last few years, the Centre deliberately mis-allocated nearly Rs3 Lakh crore collected through various cesses, to reduce the States' share of tax revenues. The Centre's dishonesty has eroded its credibility with the States and widened the trust deficit. Amidst this background, the GST compensation issue could be put to vote in the GST Council meeting today.
The GST Council has 31 States and Union Territories represented. The Council was set up in 2017 as a new financial institution with the enormous economic responsibility of directing policy for half of all tax revenues of the country.
Centre's proposal are governed by the Bharatiya Janata Party (BJP) or a BJP alliance. The 11 States that have opposed the Centre's plan are all governed by the Opposition. The 11 oposing States account for a greater share of overall GST revenues than the 20 supporting States. But it does not matter since every State, large or small, has equal weight in the GST Council. Twelve votes can veto a proposal in the GST council.
The Centre has reiterated its commitment to fulfil the GST compensation obligation to the States. So, only the modus operandi of raising funds to fulfil this obligation is to be decided. This primarily an economic issue and should be settled based on what makes the most economic sense for each State and for the nation overall.