India's Finance Minister Nirmala Sitharaman at a press conference in New Delhi on August 23, 2019. Photo: AFP / Prem Singh

The confrontation between the federal government in India and the states over the goods and services tax (GST) has worsened. The federal government has failed to pay GST taxes to the states since August and the finances of many states are in a precarious condition.

The economic slowdown has also affected the collection of the taxes levied under the GST regime. Gross domestic product growth decelerated to 4.5% in the three months ended September 30, the slowest pace since March 2013, and it was the sixth consecutive quarterly decline in growth.

The government had budgeted for 6.6 trillion rupees (US$92 billion) in GST collections for the current 2019-20 financial year and it has collected only about 50% of that in the first eight months. It had targeted 1.09 trillion rupees ($15.35 billion) of compensation tax collections, of which it has so far collected 645.28 billion rupees ($9.08 billion).

When this indirect tax reform was rolled out in August 2017, the federal government assured the states it would compensate them for reported revenue deficits on account of the implementation of the new tax regime for five years.

This compensation was to be released at the end of every two months. To raise the money, a compensation tax was also introduced as part of the new tax regime.

Though this shortfall is being felt across all states, those ruled by the opposition – Kerala, West Bengal, Punjab, Delhi and Chhattisgarh, Madhya Pradesh, Rajasthan and the Union Territory of Puducherry – are on the warpath.

They plan to initially join forces to fight for their dues, followed by passing resolutions in their respective assemblies. After exhausting these options, they plan to approach the Supreme Court, the Business Standard reported.

Last Wednesday the finance ministers of the states met India’s Finance Minister Nirmala Sitharaman and discussed the issue. She assured them that the dues would be cleared, but did not provide a timeline. She said the federal government was committed to compensating the states for their shortfall in the GST.

In addition, the states were also upset by a letter written by the GST Council to them on November 27. The council expressed concern over the strained tax collections and indicated to the states that it may not be able to compensate them for the loss of revenue.

The council said a meeting would be held in the second half of December 2019, where it intends to discuss measures to augment GST revenue collection. To meet the shortfall, the GST Council will review all items that are now exempted under the GST and bring some of them into the tax ambit.

The proposed move to change the taxation structure is expected to upset many states and people in general as it will lead to a rise in the prices of some essential commodities.

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