Rethinking distribution

There are some resolved and hitherto unexplored issues of fiscal federalism in the aftermath of the introduction of the GST framework. It is time to critically examine these and introduce necessary changes and amendments to the laws and even the Constitution. The entire gamut of issues relating to fiscal federalism and distribution of resources and powers, including the distribution of subjects between Centre and states, should be viewed from a holistic viewpoint.

Institutional mechanism for the operation of India's fiscal federation needs a complete overhaul, both in the context of present-day political compulsions as well as in the context of the new system of indirect tax administration introduced under the GST system.

There are incongruities and political absurdities which are crying out for resolution and have been highlighted by one of the most experienced and accomplished administrators in the country, NK Singh. Singh had been the revenue secretary in the Narasimha Rao government which was responsible for introducing the most far-reaching economic reforms in the country.

NK Singh, currently chairman, Fifteenth Finance Commission and an adviser to Bihar chief minister Nitish Kumar, has drawn attention to serious contradictions and conflicts between the operations of the Finance Commission and the GST Council.

He has underlined the need for a "coordination mechanism" between the two. Singh made the observations in course of this year's "L.K. Jha Memorial Lecture", which is organised by the Reserve Bank of India.

Unbeknownst to most, even among those who are interested, in the current political heat of Maharashtra government formation, NK Singh's lecture at the RBI headquarters went unnoticed. In more normal times, it would have kicked off a storm.

Singh's contention is that while both are creatures of the Constitution, the GST Council now spells out virtually all the rates, exemptions, monitoring of GST revenue collections and its distribution between the Centre and states.

So between 2022 and 2025, for which period the current Finance Commission is supposed to indicate the formula for distribution of financial resources, the distribution of GST revenues would be determined by the GST Council. This will be a direct dilution of the powers and remit of the Finance Commission.

Indirect taxation, which is what GST now includes, accounts for almost half of

the gross revenues. Additionally, state governments

have transferred their taxing powers to the GST Council. So, a vital part of state finances will be dictated by the GST Council.

Under the Constitution, the Finance commissions recommend distribution of revenues between Union and the States and thereafter, further among the States to the third tier.

In course of its deliberations, the Finance Commission is obliged to look at projections of the expenditure and revenue but the issue of GST rates exemptions, changes and implementation of the indirect taxes are entirely within the domain of the GST Council.

"This leads to unsettled questions on the ways to monitor, scrutinise and optimise revenue outcomes" Singh pointed out. In the haste for implementing the GST framework, many of these subsequent issues have not been thought through. A misaligned tax infrastructure, covering the gamut of indirect taxes will be a drag and there is reason to believe that the GST had a considerable influence in inducing the current slowdown.

"Since both the Finance Commission and the GST Council are constitutional bodies, the coordination mechanism between the two is now an inescapable necessity" observed Singh.

For the first five years of the GST, 14 per cent guaranteed compensation by the Goods and Services Tax (Compensation to states act) 2017 is provided to states. Many states are calling for an extension of the provision for compensation. In fact, the way the GST revenues are going, more so in the context of the current slowdown, there will be an overall revenue shortfall and therefore, this new tax paradigm would have implications for both state and Central finances.

Singh has also called for a radical recast of the seventh schedule of the Constitution distributing subjects between Centre and states, having implications for overall revenues and expenditures of the Centre and states. Considering that many of the seminal social sector schemes are being spearheaded by the Centre, there is needed to rethink the comparative roles of the governments at the two tiers.

Take, for instance, the implementation of the PM-Kisan scheme which is in the current controversy. The outlay on the scheme – some 75,000 crore rupees – remained undisguised because many of the states refused to share data on farmers. Once again, when the rural demand has collapsed and there is widespread reported farmer distress, pushing this amount of money under the scheme could be thought to have changed matters. One has to take another approach to the distribution of the subjects in the current context.

Most poignantly, Singh questioned whether it is reasonable for a Prime Minister visiting a state to say that he was not in a position to provide any support for drinking water, enhanced power supply or for development of agriculture because these subjects were in List II of the seventh schedule which fell under the purview of states.

The nature of governance has changed. We live in a society in which people look up to political leadership for taking them to the next higher stage of society with technology, science, global tie-ups and other inputs. Even otherwise, the need for recasting the distribution of powers and subjects between Centre and states has been felt for a long time. Hence, it is imperative that some high-level body was immediately set up to suggest a new seventh schedule.

Views expressed are strictly personal