Centre’s Sacrifice of GST Revenue for State Compensation, Says Former CEA

The Centre has foregone a substantial amount of revenue from Goods and Services Tax (GST), equivalent to up to 1% of GDP annually since the implementation of the new indirect tax system, in order to uphold a guaranteed 14% compensation to states, former Chief Economic Advisor Arvind Subramanian highlighted on Thursday.

Subramanian, a pivotal figure in GST implementation, emphasized that including petrol and alcohol under GST isn’t advisable presently. GST, initiated on July 1, 2017, streamlined the tax structure by merging 17 taxes and 13 cesses into a five-tier system.

Speaking at an event hosted by the Centre for Social and Economic Progress (CSEP), Subramanian hailed GST as a testament to cooperative federalism, countering assertions of central fiscal dominance in recent years.

He underscored that the Centre’s revenue loss has ranged from 0.5% to 1% of GDP annually over the past seven years, suggesting that restructuring cess rates could obviate future compensation needs.

Despite initial complexities, GST revenues have rebounded to pre-GST levels, indicating improved collections and a more equitable indirect tax regime. Subramanian advocated for essential GST reforms, although he deemed them unlikely in the current environment.

Regarding alcohol and petroleum, Subramanian cautioned against including them in GST, citing political sensitivities and states’ fiscal autonomy. He noted the discontinuation of GST compensation cess after fiscal year 2021-22, underscoring GST’s significant contribution to state revenues.