Institutional mechanism for the operation of India’s fiscal federation needs 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 which have been highlighted by one of the most experienced and accomplished administrators in the country — N.K. Singh, who has been revenue secretary in the Narasimha Rao government which had introduced the most far reaching economic reforms in the country.

Mr N.K. 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. Mr 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 lately went unnoticed. In more normal times, it would have kicked off a storm.

Mr Singh contention is that that while both are creatures of the constitution, the GST Council virtually now spells out the rates, exemptions, monitoring of GST revenue collections and its distribution between the centre and the 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 —that is what GST now includes— accounts for almost half of the gross revenues. Additionally, the 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, among the States further to the third tier.

In course of its deliberations, the Finance Commission is obliged to look at projections of the expenditure and revenue, but 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” Mr 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 Mr Singh.

For the first five years of the GST, a 14 per cent guaranteed compensation by the Goods and Services Tax (Compensation to states act) 2017 is provided to the States. Many states are calling for 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 overall revenue shortfall and therefore these new tax paradigm would have implications for both state and central finances.

Mr Singh has also called for radical recast of the seventh schedule of the Constitution distributing subjects between centre and the states, having implications for overall revenues and expenditures of the centre and the 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 current controversy. The outlay on the scheme —some Rs 75,000 crore— remained undisguised because of the 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 a re-look at 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 had changed. We have an aspirational society in which people look upto political leadership for taking them to the next higher stage with technology, science, global tie ups and other inputs for reaching the cherished growth and overall development. Even otherwise, the need for recasting the distribution of powers and subjects between centre and states have been felt for a long time. Hence it is imperative that some high level body was immediately set up suggest a new seventh schedule. (IPA Service)