GST Reform and Smaller States

The new Goods & Services Tax (GST) may not achieve the desired goal of making India’s economy one of the strongest in the world, if it continues to ignore financial interests of the smaller states. Since its inception on July 1, 2017 till the announcement of the new tax reforms, all the states used to get 14 per cent share from the total collection per annum as compensations for their revenue loss as the GST has taken away the powers from the states to impose taxes on goods and services. Initially, it was decided that the compensation would be given for the first five years, but it was extended for three more years due to the COVID-19 pandemic. Although, the GST collection is expected to reach a new high with the reduction of the four-tier tax slabs to two and making a fresh slab for sin (ultra luxury goods), no plan B has been prepared in case of any gaps between expectation and reality. The absence of alternative strategy can hurt the smaller states more than the bigger ones as their resources are limited. It will be almost impossible for these states to register a 14 per cent economic growth per annum. So, the withdrawal of compensation will cause a dent in the exchequer of such states, leading to possible unrecoverable financial loss.

As a matter of fact, absence of micro-level adjustments has been a bane for India as state-specific policies have never been formulated. While the larger states continue to get a bigger share of economic relief, smaller states continue to suffer due to lack of adequate funds needed for development. In this regard, the Northeastern region is likely to be affected as excessive stress on pan-India policies have failed to pull the region out of underdevelopment. It may be argued that the states in the region have not been able to reap the benefits of the tax holiday announced in the early nineties, but the fact remains that the policy was a non-starter from day one due to the geographical distance between the Northeast and the mainland, as it is not feasible to promote the products from the region to other parts of the country. Moreover, poor connectivity and lack of proper infrastructure have never allowed tourism to flourish in this region, a privilege which states like Himachal Pradesh, Uttarakhand and Goa, among others, have exploited the most.

So, the need of the hour is to provide proper financial assistance to the smaller states after the withdrawal of 14 per cent per annum compensation. A special policy, including hiking of share for smaller states from the current 50:50 split for CGST and SGST, can be considered to alleviate their financial burden and bridge the development gap.