The Economic Survey 2023 by the Financial Minister Nirmala Sitharaman reviews the performance of the Indian economy to date and predicts for the next fiscal year.
While analysing the last five years of experience with GST have seen several rounds of policy debates around rate rationalisation, simplification of return filing, compensation cess levies on products, compensation payments to states etc. Comparison of total financial resources accruing to States in the pre and post-GST regimes point out to take measure the relative performance of taxes vis-à-vis the performance of the economy.
As per the survey report the post-GST period, total fiscal resources accruing to the states from the GST (including devolution from the Centre’s GST) exhibited a buoyancy greater than that in the pre-GST period.
Compensation was provided to the states in the post-GST period, since GST was a new tax regime, the compensation scheme was designed to safeguard the states from any difference in the new versus the old tax regime by ensuring steady revenue growth of 14 per cent per annum for five years.
The compensation arrangement was meant to help states ride out the differences in the inter-state distribution of GST. It is pertinent to note here that the compensation system was not envisaged as a buffer to the state’s revenues in the eventuality of a fall in tax revenues resulting from a collapse in economic growth.
It was analysed that the incidence of the pandemic has highlighted the relevance of GST Compensation as a buffer to the States’ revenues. Despite having limited financial resources in the middle of a crisis, the Centre borrowed funds and passed them on to States on a back-to-back loan basis, in addition to the release of regular GST compensation. These loans will be repaid from future inflows into the GST Compensation Cess Fund and hence are not a burden on the states.
The survey concluded that “the GST regime and its implementation mechanism have not only safeguarded the States’ revenues from the initial teething troubles of a new tax system but also protected the States’ finances amidst unprecedented external shocks during the last five years.”
The absence of GST would have troubled the Indian state by having no recourse to compensation, nor could they have contemplated augmenting their revenues through fresh and/or higher levies during a pandemic.
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