GST

GST Council Registers a Success

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GST Council deferred the decision on levying a cess on sugar on May 4th. A union cess is problematic because the revenue earned by levying it does not form a part of the ‘divisible pool’ of resources, meaning that no part of it goes to state governments.

The trick by the union government is not new. A 2016 EPW article had made a note of this trend:

It is observed that over the years there has been a proliferation of cess and surcharges in union tax revenues. As these levies are not shareable with the states, this has resulted in effective reduction in the divisible pool of resources available for transfers to states. The share of cess and surcharge in the gross tax revenues of the union government has been rising over the years. It increased from 9.43% in 2011–12 to 16.7% in 2015–16 (RE).

 

Quite naturally, state finance ministers opposed the introduction of the 5 percent cess on sugar that was being pushed by the union government. However, this proposal was put on hold after a meeting of the GST Council. The fact that the state governments had a say over the union government’s levy of a cess and were able to block it indicates that the GST Council is on the right track. In a limited sense, it is emerging as a powerful institution for intergovernmental bargaining. This is a good sign for making cooperative federalism a reality.

 

The Second Order Effects Have Begun

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Financial Express reports that demonetisation and glitches in GST implementation has led to a loss of 4 lakh jobs, erosion of wages, and reduced exports in the textile industry in Surat.

The Federation of Surat Textile Traders Association (FOSTTA) claims that after the rollout of the new tax structure, over 4 lakh jobs have been lost with many of the textile units in the city running far below their installed capacity. Moreover, the past 18 months have seen sales slump by about 30-40 % and payments getting delayed.

It further mentions that the small and unorganised textile units are not able to comprehend the complex GST rules. The delay in refund has also led to a fall in export orders.

Nearly a year and half after demonetisation, the second order effects are beginning to show up. The recent shortage of currency is another such second order effect. Any big macroeconomic shock will have multiple rounds of effects – the growth slowdown and all the associated effects in 2016-17 was just the first order effect. Unfortunately, I believe we’ll see many more stories of particular industries getting affected in novel ways due to the double whammy of demonetisation and the faulty implementation of GST.