The government budget is an essential component that divides the revenue generated by the government between the Centre and the state. In the case of federalism, when the states are subordinate to the jurisdiction of the Central government, they are likely to generate less profit and incur more loss than the Central government. This loss can be due to GST compensation to states, the existing liabilities, or infrastructural purposes. Here the major loss to the states is due to the imposition of GST on clothing, amenities, transportation facilities, etc. These impositions create a liability on the states, and thus, the state incurs several losses.

What is GST?

  • GST stands for Goods and Services Act; it was brought in India in 2017 to tackle the complexity of the tax system in the country. 
  • Earlier, an individual had to pay dozens of taxes while manufacturing or transferring a good at many levels, which often felt problematic to numerous people and hindered growing businesses due to difficulty understanding the complex tax system.
  • The government then sought to introduce GST to combine all the taxes into one indirect tax and make a flexible tax system.
  • It refers to the consumption-based tax imposed on the sale, manufacture, and consumption of goods and services at a country level. 
  • This tax includes crude petroleum, motor spirit, diesel, aviation, turbine fuel, natural gas, common salt, vegetables, eggs, and contraceptives. 
  • GST comprises various tax slabs, including 5%, 12%, 18%, and 25%, which are applied at the discretion of the Central Government.
  • GST is levied on three levels, Centre Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and Integrated Goods and Services Tax (IGST). 

GST compensation to states

  • When GST introduction was in talks in the Parliament, the states were reluctant to uphold this decision, as it would decrease their revenue imposed on many levels whenever any goods passed through their boundary and result in a loss to the states. In this situation, the Centre intervened and promised to pay the difference as GST compensation to states on various dynamics, including GST on clothing or other amenities. 
  • Moreover, it also promised to pay, considering a 14% growth in states’ revenue every year, and this amount was to be paid through the GST compensation cess.
  • This compensation is governed through the Goods and Services Tax (Compensation to States) Act, 2017, which provides a system to compensate the states by the Centre due to loss of revenue by GST. It takes 2015-16 as the base year for calculating the revenue payable to the states.

GST on commodities

  • The full form of the GST suggests that it includes the goods and services of the economy. These goods cover a wide range of products, from clothes to furniture. 
  • Earlier the rate of GST on clothing in India was 5% which was later raised to 12% through a notification issued by the Central Board of Indirect Tax and Customs (CBIC). It came into effect on 1 January 2022. 
  • Other rates of GST include 5% on sugar, tea, and LPG; 12% on mobiles and biogas; 18% on iron and steel, chlorine, and a few beauty products; and 22% on consumer durables, perfumes, and tobacco products like Pan Masala. 

Other sources of loss to states

  • States incur various losses other than GST compensation. These losses are primarily due to borrowing from the Centre or banks.
  • Another source that causes loss to states is the disinvestment of state properties, as it reduces an asset used to create profit for the states.
  • Other sources can be due to calamities, as it creates heavy liability on the state to rebuild the property or give grants to the people. 

Payment in foreign currency within India

  • The Reserve Bank of India (RBI) runs the indigenous currency system, which issues currency on behalf of the Central Government. This currency is called ‘rupee’ and has the signature of the governor of the RBI embedded in it.
  • However, India allows the exchange of foreign currency to a certain extent. The different states attract a wide range of tourists from other countries, but they follow the rules laid by RBI for facilitating payment in foreign currency within India.

Conclusion

It can be rightly concluded from the facts mentioned above and data combined from various sources that states suffer lots of losses due to GST implementation. It was supposed to be resolved through compensation provided by the Centre, but this practice is loose and has many drawbacks. These compensations are overdue by the Centre even in the GST (Compensation to States) Act, which increases liabilities in the states. The other losses, such as calamities and interest payments to the banks and other lenders, bring down the profit margin of the states, and thus, the states incur losses.