- Extending GST compensation as a reform catalyst
- Treating the planet well can aid progress
Extending GST compensation as a reform catalyst
The implementation of the Goods and Services Tax (GST) in India was a grand experiment in cooperative federalism. The transition to GST is still in progress and an extension will provide comfort to States to help roll out crucial changes
GS Paper – 3: Government Policies & Interventions, Growth & Development, Constitutional Bodies
Dimensions of the Article:
- Implementation of GST
- How the compensation is calculated?
- Why there is mistrust?
- What are the issues?
- Need for Reform
- Way forward
Implementation of GST:
- With the implementation of the GST, both the Union and the States joined hands to rationalise cascading domestic trade taxes and evolve a value-added tax on goods and services.
- Although the rate structure was presumed to be revenue neutral, the States agreed to forgo their revenue autonomy in favour of tax harmonisation.
- This was in the hope that in the medium term, it can improve compliance arising from the self-policing nature of the tax.
How the compensation is calculated?
- To allay the fears of States of possible revenue loss by implementing GST in the short term, the Union government promised to pay compensation for any loss of revenue in the evolutionary phase of five years.
- The compensation was to be calculated as the shortfall in actual revenue collections in GST from the revenue the States would have got from the taxes merged in the GST.
- This was estimated by taking the revenue from the merged taxes in 2015-16 as the base and applying the growth rate of 14% every year.
- To finance the compensation requirements, a GST compensation cess was levied on certain items such as tobacco products, automobiles, coal and solid fuels manufactured from lignite, pan masala and aerated waters.
- Initial years of GST implementation:
- In the first two years of its implementation, the amount of compensation to be paid to the States was modest and the compensation cess was sufficient to meet the requirements.
- In fact, the cess collections exceeded the compensation requirements in 2017-18 and 2018-19.
Why there is mistrust?
- In 2018-19, the shortfall in the payment requirement from the cess collections could be met from the surpluses of the previous two years kept as balance in the compensation fund.
- However, in 2020-21, due to the most severe lockdown following the novel coronavirus pandemic, there was loss of revenue to States- a part of it was expected to accrue from the compensation cess.
- The union Government decided to pay remaining balance by borrowing from the Reserve Bank of India under a special window.
- The interest and repayment were to be paid from the collections from compensation cess in the future.
- However, the entire compensation payment episode plunged the Union-State relationship to a new low, creating mistrust.
- The agreement to pay compensation for the loss of revenue was for a period of five years which will come to an end by June 2022;
- Considering the uncertainty in revenue collections faced by the States, they are keen that the compensation scheme should continue for another five years.
What are the issues?
- Although it was hoped that the tax structure would stabilise in the first five years, the reform is still in transition.
- IT Infrastructure: The technology platform could not be firmed up for a long time due to which the initially planned returns could not be filed.
- This led to large-scale misuse of input tax credit using fake invoices.
- The adverse impact on revenue collections due to this was compounded by the pandemic-induced lockdowns.
- Revenue Uncertainty of States:
- This is the only major source of revenue for the States and considering their increased spending commitments to protect the lives and livelihoods of people, they would like to mitigate revenue uncertainty to the extent they can.
- They have no means to cushion this uncertainty for the Finance Commission which is supposed to take into account the States’ capacities and needs in its recommendations has already submitted its recommendation.
- More importantly, the structure of GST needs significant changes and the cooperation of States is necessary to carry out the required reforms.
Need for Reform:
- It is very well acknowledged that the structure of GST requires significant reforms.
- Almost 50% of the consumption items included in the consumer price index are in the exemption list; broadening the base of the tax requires significant pruning of these items.
- It is necessary to bring petroleum products, real estate, alcohol for human consumption and electricity into the GST fold.
- Multiple Tax rates: The present structure is far too complicated with four main rates (5%, 12%, 18% and 28%).
- This is in addition to special rates on precious and semi-precious stones and metals and cess on ‘demerit’ and luxury items at rates varying from 15% to 96% of the tax rate applicable which have complicated the tax enormously.
- Multiple rates can:
- complicate the tax system,
- cause administrative and compliance problems,
- create inverted duty structure and
- lead to classification disputes.
- Cooperation of states:
- Reforming the structure to unify the rates is imperative and this cannot be done without the cooperation of States.
- They would be unwilling to agree to rationalise rates unless the compensation payment for the revenue loss is continued.
- Extension of compensation payment: Thus, extending the compensation payment for the loss of revenue for the next five years is necessary not only because the transition to GST is still underway but also to provide comfort to States to partake in the reform and improve public service delivery.
- Reforming the structure: It is needed to complete the process of transition to a reasonably well-structured GST. It not only enhances the buoyancy of the tax in the medium term but also to reduce administrative and compliance costs to improve ease of doing business and minimise distortions.
- As pointed by many, the compensation scheme of applying 14% growth on the base year revenue provided for the first five years was far too generous
- The issue can be revisited and the rate of growth of reference revenue for calculating compensation can be linked to the growth of GSDP in States to ensure the comfort of minimum certainty on the revenue.
- This will incentivise them to accomplish the reform in the true spirit of cooperative federalism.
Treating the planet well can aid progress
Need for an integrated perspective to address social and environmental problems as they cannot be addressed in isolation anymore.
GS Paper – 2: Human Resource, Growth & Development.
GS Paper – 3: Inclusive Growth, Environmental Pollution & Degradation, Conservation, International Treaties & Agreements
Dimensions of the Article:
- United Nations Development Program (UNDP) Indicators
- Planetary pressure adjusted HDI
- Impact of adjusting planetary pressure on Country ranking
- What are the Challenges?
- Better Awareness now
- Way Forward
United Nations Development Programme (UNDP) Indicators:
- The 2020 Human Development Report of the United Nations Development Programme (UNDP), titled “The Next Frontier – Human Development and the Anthropocene” proposed a planetary pressure-adjusted Human Development Index (HDI).
- Ever since the UNDP took up computation of the HDI driven by the vision of Mahbub ul Haq and articulated by Amartya Sen in 1990, there have been adjustments such as inequality-adjusted HDI.
- Besides, there was computation of several other indices such as
- Gender Development Index,
- Gender Inequality Index, and
- Multidimensional Poverty Index
- These were aimed to flag the issues that warranted the attention of policymakers.
- The environment is one such issue now considered to be an essential component to be factored in to measure human development.
Planetary pressure adjusted HDI:
- The concept of the planetary boundary was introduced by a group of scientists across the world, led by J. Rockström of the Stockholm Resilience Centre in 2009.
- This was to highlight that human-induced environmental change can irrevocably destabilise the long-term dynamics of the earth system, thereby disrupting the life-supporting system of the planet.
- Both global and local evidence indicate that biodiversity loss, climate change, land system/land-use change, disruption of biogeochemical cycles, and scarcity of freshwater availability are a threat and increase the vulnerability of society.
- The purpose of the planetary pressure adjusted HDI, or PHDI, is to communicate to the larger society the risk involved in continuing with existing practices in our resource use and environmental management, and the retarding effect that environmental stress can perpetuate on development.
Impact of adjusting planetary pressure on Country ranking:
- The global ranking of several countries was altered, in a positive and negative sense, with adjustment of planetary pressure.
- The world average of HDI in 2019 came down from 0.737 to 0.683.
- This adjustment has been worked out by factoring per capita carbon dioxide (CO2) emission (production), and per capita material footprint.
- The average per capita global CO2 emission (production) is 4.6 tonnes and the per capita material footprint is 12.3 tonnes.
- Switzerland is the only country in the group of high human development countries whose world rank has not changed with this, although the HDI value slightly dropped.
- It succinctly brings out the nature of planetary pressure generated by the developed countries and indirectly indicates their responsibility in combating the situation.
- In the case of India: The PHDI is 0.626 against an HDI of 0.645 with an average per capita CO2 emission and material footprints of 2.0 tonnes and 4.6 tonnes, respectively.
- India gained in global rankings by eight points (131st rank under HDI and 123rd rank under PHDI), and its per capita carbon emission (production) and material footprint are well below the global average.
What are the Challenges?
- India’s natural resource use is far from efficient, environmental problems are growing.
- At the same time, India has 27.9% people under the Multidimensional Poverty Index ranging from 1.10% in Kerala to 52.50% in Bihar, and a sizable section of them directly depend on natural resources for their sustenance.
- Kerala has an exemplary achievement in human development with an HDI value of 0.775, well above the all-India average.
- However, on the environmental front there are several challenges which warrant concrete actions; otherwise, the gains of human development may not be sustained.
- The twin challenges of poverty alleviation and environmental safeguarding that former Prime Minister Indira Gandhi first articulated in her lecture during the Stockholm conference on the human environment in 1972 still remain unattended.
- In fact, the situation is much more complex now.
- The latest initiative by UN, the adoption of 17 Sustainable Development Goals (SDG) with a specific target to meet by 2030.
- The SDGs have acquired high priority in the context of the issue of climate change and its impact on society.
- Human-induced climate change has emerged as an important issue of global deliberations.
- The Sixth Assessment Report (AR6) of the Intergovernmental Panel on Climate Change (IPCC) 2021 laid stress on limiting global temperature rise at the 1.5° C level and strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty.
- This was reaffirmed in the Conference of Parties (COP) 26 at Glasgow in 2021.
- ‘No poverty’ and ‘Zero hunger’ are the first and second SDGs.
- According to NITI Aayog (2020-21), out of 100 points set for the grade of Achiever, India scored 60 (Performer grade) for no poverty and 47 (Aspirant grade) for zero hunger, with wide State-level variations.
- India’s score in the SDGs:
- Score: 8 for ‘Decent work and economic growth’.
- Score: 9 for ‘Industry, Innovation and Infrastructure’
- Score: 12 for ‘Responsible Consumption and Production’.
- These scores are considered for working out planetary pressure — are 61 (performer), 55 (performer) and 74 (front runner), respectively.
Better Awareness now:
- The Chipko movement (1973) in Uttarakhand and the Silent Valley movement (the late 1970s) in Kerala are two of the most well-known modern-day people’s movements for environmental protection in India that inspired several other environmental movements during the last five decades.
- Subsequently, there is now widespread awareness about the environment and several initiatives both at the level of the government and the community.
- However, standalone environmental safeguarding actions are not sufficient to navigate the Anthropocene
- It is now well established that there are interdependencies of earth system processes including social processes, and their relationships are non-linear and dialectic.
- Therefore, the central challenge is to nest human development including social and economic systems into the ecosystem, and biosphere building on a systematic approach to nature-based solutions that put people at the core.
- It is now essential to consider people and the planet as being a part of an interconnected social-ecological system.
- Social and environmental problems cannot be addressed in isolation anymore
- This can be conceived and addressed at the local level, for which India has constitutional provisions in the form of the 73rd and 74th Amendments.
- The remarkable advances in earth system science and sustainability research along with enabling technology of remote sensing and geographic information system have helped to document and explain the impact of human activities at the ground level and stimulate new interdisciplinary work encompassing the natural and social sciences.
- They also provide insights into how to mitigate these impacts and improve life.
- What is required is:
- a reorientation of the planning process,
- adoption of a decentralised approach,
- a plan for proper institutional arrangements, and
- steps to enable political decisions.