[V.Narayan]

It is violation, by the Centre, of a contract between the Centre and the States. Simple and damning as that. It eats into the foundation of the federal structure. The Centre has caused untold very long term damage to the credibility of the Indian Govt in the eyes of every potential lender or creditor out into the future. Lenders, unlike voters, have very long memories. Either the Centre does not understand the basics of economics or they believe they can get away with it unscathed or both. As this is a non-political forum I'll exercise restraint in saying more {Sutripta :-)}. I expect this event to have very long term impact on the polity of our country. What the GoI is saying is we have a financial emergency but won't call it out. It is a situation open to gross misuse.

[Sutripta]

Originally Posted by V.Narayan

It is violation, by the Centre, of a contract between the Centre and the States. Simple and damning as that. It eats into the foundation of the federal structure. The Centre has caused untold very long term damage to the credibility of the Indian Govt in the eyes of every potential lender or creditor out into the future. Lenders, unlike voters, have very long memories. Either the Centre does not understand the basics of economics or they believe they can get away with it unscathed or both. As this is a non-political forum I'll exercise restraint in saying more {Sutripta :-)}. I expect this event to have very long term impact on the polity of our country. What the GoI is saying is we have a financial emergency but won't call it out. It is a situation open to gross misuse.

Wonder how many people here know that when Kingfisher went bust, the aircraft lease/ finance costs for EVERY Indian airline went up.

I think I'll follow your advice on restraint.

What is shocking and sad is the number of people who think it is perfectly natural, in fact desirable that it is playing out the way it is. Just because of their political views. And equally the (very small) number of people who think it is terrible, but once again only because of their political views.

The next chapter will be on cries of discrimination and favouritism when it comes to handing out resources by the GOI to the States.

Sutripta

[Dry Ice]

Talking of the Govt running out of funds, this came up on my twitter feed.



Assuming they "force" people to retire, the retirement benefits will also be limited? Wonder what kind of savings are they looking at with such a move.

Ironic considering Parliament members are eligible for pensions with just a 5 year stint.

[V.Narayan]

Originally Posted by Dry Ice

Talking of the Govt running out of funds, this came up on my twitter feed.

Attachment 2049592

Assuming they "force" people to retire, the retirement benefits will also be limited? Wonder what kind of savings are they looking at with such a move.

Ironic considering Parliament members are eligible for pensions with just a 5 year stint.

A good starting point I would say. Too many Govt officials work with a sense of immunity. I don't think this has much to do with cost savings though in a small way that may result. For too many decades Govt officers and clerks work with a sense that in any case they cannot be brought to task in any meaningful way. I don't say all are lazy and nasty. But the 20% that are need to go. Sorry for the rant.

[rdst_1]

Originally Posted by V.Narayan

. I don't say all are lazy and nasty. But the 20% that are need to go. Sorry for the rant.

I think I would be going a little bit OT but the number you quote seems to be very low. Because otherwise it wouldn't have been too hard for the other 80% to keep those 20% in line. I think even in the top IT companies of India, there would very easily be 20% people who are not that productive but the rest easily carry the load and the companies are doing pretty well unlike our public offices.

[Rahul Bhalgat]

Originally Posted by V.Narayan

Question for the experts.

The Centre is failing to pay the States their fair share of GST, Income Tax etc. Is the Central Government going broke? or are they playing mischief?

One query:

When we pay GST, we calculate the State GST, the Central GST and the IGST separately. Does the SGST amount directly go to the State's account? Or the entire amount (what we pay) goes into the Centre's account and then they transfer the SGST to the States?

I expect that the SGST shall directly go to the State's account because it fully belongs to them. Out of IGST (and maybe CGST), the Centre retains some share and pays the rest to the States. So IGST shall be going to the Centre's account, from where they pay the share of States.

So what exactly is the problem faced by the States? Not getting the promised compensation in the shortfall or not getting the SGST itself?

[Dry Ice]

Originally Posted by Rahul Bhalgat

One query:

When we pay GST, we calculate the State GST, the Central GST and the IGST separately. Does the SGST amount directly go to the State's account? Or the entire amount (what we pay) goes into the Centre's account and then they transfer the SGST to the States?

I expect that the SGST shall directly go to the State's account because it fully belongs to them. Out of IGST (and maybe CGST), the Centre retains some share and pays the rest to the States. So IGST shall be going to the Centre's account, from where they pay the share of States.

So what exactly is the problem faced by the States? Not getting the promised compensation in the shortfall or not getting the SGST itself?

It's not that simple. While the earlier regimes used to tax at the manufacturing stage, GST is applied at the consumption stage. This causes the manufacturing states like TN, MH etc to lose out on revenue they were entitled to in the pre-GST era. Hence their opposition to the GST implementation. To get them on board, center promised to make good any shortfall of their tax revenue for 5 years since the GST rollout. This additional compensation was to be collected as a "cess" on mostly sin goods. A big carrot in this compensation scheme (for states) was an annual growth rate of 14% in tax revenues. This is fixed and is not dependent on any indicators. In reality the actual growth rate in revenues maybe 10-11% or less.

Now the cess amount collected to compensate the states is not enough to cover the compensation payable to states resulting in a shortfall in state budgets.

[DigitalOne]

Originally Posted by Rahul Bhalgat

One query:

So what exactly is the problem faced by the States? Not getting the promised compensation in the shortfall or not getting the SGST itself?

Originally Posted by Dry Ice

It's not that simple. While the earlier regimes used to tax at the manufacturing stage, GST is applied at the consumption stage. This causes the manufacturing states like TN, MH etc to lose out on revenue they were entitled to in the pre-GST era. Hence their opposition to the GST implementation. To get them on board, center promised to make good any shortfall of their tax revenue for 5 years since the GST rollout. This additional compensation was to be collected as a "cess" on mostly sin goods. A big carrot in this compensation scheme (for states) was an annual growth rate of 14% in tax revenues. This is fixed and is not dependent on any indicators. In reality the actual growth rate in revenues maybe 10-11% or less.

Now the cess amount collected to compensate the states is not enough to cover the compensation payable to states resulting in a shortfall in state budgets.

The answer by Dry Ice is a very succint answer to the current issue. The issue has nothing to do with Income tax or other direct taxes.

How the CGST and IGST gets distributed to the states are according to well-defined formulas and there is no dispute in this. As revenues fall everybody is in the same s**t.

The issue is only in the 14% guaranteed increase in compensation cess that was promised and CG now unable to fulfil it.

I work for a major MNC IT products company, in the India GST solutions team. We provide GST software for almost all the major Indian corporates. So I know a thing or two on GST was implemented (also on political level how things were/are decided). Trust me, there is tremendous support across parties for GST, also on how it was implemented. Public posturing will anyway be different . It is us lay people who get sucked into needles political debates without understanding the basis of the issues.

This issue is just a storm in a teacup, a negotiating tactic to increase the compensation period for another five years (till 2027).

[Cessna182]

Originally Posted by DigitalOne

This issue is just a storm in a teacup, a negotiating tactic to increase the compensation period for another five years (till 2027).

One state failed to pay teachers and nurses recently. My relative is a victim. Will request you to stop sharing fake news and realize how bad things are. Pensioners are not getting even their basic needs. At least now be a realist. A couple of lakh crores being owed to the states is not a joke.

[DigitalOne]

Originally Posted by Cessna182

Will request you to stop sharing fake news and realize how bad things are.

My last line was poorly worded, and it has rightly been misconstrued. My intention was not too trivialise the economic distress. Far from it.

The intention is just to inform what the "compensation cess" issue is about, why it was introduced, how it is received and distributed to states.

When GST was introduced, there were 4 central acts (IGST, Union territory GST, CGST, and GST (Compensation to States) Act). Every state enacted their own SGST acts. ( Off topic: the GST (Compensation to States) Act is unique that it is time-bound, and there was huge debates at that time whether it should be an constitutional Act, or just a parliamentary bill. )

For IGST, and CGST the devolution formula to the states is also set by the respective acts and here there is no dispute. The centre has no say or discretion. If the revenue from these two falls, then everybody is in same boat, but (post 2022) centre has no obligation to offset any losses. This is what will happen from (currently) 2022.

Please read the below linked article for an objective view on what will happen post 2022.

Coming to the compensation part, I will post relevant parts from this article.

Why is the Centre required to compensate states for GST?

With GST implementation in 2017, the principle of indirect taxation for many goods and services changed from origin-based to destination-based. This means that the ability to tax goods and services and raise revenue shifted from origin states (where the good or service is produced) to destination states (where it is consumed). This change posed a risk of revenue uncertainty for some states. This concern of states was addressed through constitutional amendments, requiring Parliament to make a law to provide for compensation to states for five years to avoid any revenue loss due to GST.

For this purpose, the GST (Compensation to States) Act was enacted in 2017 on the recommendation of the GST Council. The Act guarantees all states an annual growth rate of 14 percent in their GST revenue during the period July 2017-June 2022. If a state’s GST revenue grows slower than 14 percent, such ‘loss of revenue’ will be taken care of by the Centre by providing GST compensation grants to the state. To provide these grants, the Centre levies a GST compensation cess on certain luxury and sin goods such as cigarettes and tobacco products, pan masala, caffeinated beverages, coal, and certain passenger vehicles. The Act requires the Centre to credit this cess revenue into a separate Compensation Fund and all compensation grants to states are required to be paid out of the money available in this Fund.

Note that under the GST (Compensation to States) Act, 2017, Centre can provide compensation to states only through the money available in the Compensation Fund. The Union Finance Minister, in her budget speech in February 2020, clarified that transfers to the Fund would be limited only to collections of the GST compensation cess. Despite a shortfall of money in the Compensation Fund, the Centre is constitutionally obligated to meet states’ compensation requirement for a period of five years.

How centre will meet the constitutionally guaranteed 'compensation part' is to be seen; and that's where I said, there would be a "give-and-take".

[Rahul Bhalgat]

Originally Posted by DigitalOne

How the CGST and IGST gets distributed to the states are according to well-defined formulas and there is no dispute in this. As revenues fall everybody is in the same s**t.

The issue is only in the 14% guaranteed increase in compensation cess that was promised and CG now unable to fulfil it.

Thanks for elaborating.

So, the States are getting the SGST amount as well as their share of IGST and CGST (if any). The revenue of the States (and of Centre too) has fallen due to Covid effect on the Economy.

And what the Centre has failed to give is the compensation cess amount.

[ashokrajagopal]

Originally Posted by vrprabhu

Makes perfect sense to me.
--SNIP---
Ashok, assuming you have been given divine powers to set right the situation, what would you do (purely academic interest on my part)?

Apologies for delay in reply, you are too kind with your words, thanks.
I am as clueless as anybody else. Everybody knows demand needs to pick up, that is why you see all kinds of suggestions ranging from doubling MNREGA on the one side to completely doing away with Income tax on the other side (Dr. Subramanian Swamy).
Either way, that primarily requires an admission that there is a problem. But the government never admitted despite a secular stagnation for the last 2 years; always looking for those temporary "green shoot" numbers.


I am not sure it would go thru, but this here, is exactly the opposite of demand generation.
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Originally Posted by Dry Ice

Talking of the Govt running out of funds, this came up on my twitter feed.

Assuming they "force" people to retire, the retirement benefits will also be limited? Wonder what kind of savings are they looking at with such a move.
Ironic considering Parliament members are eligible for pensions with just a 5 year stint.

If we are in a state of indirect tax depletion, this is not just pointless, but quite detrimental.

Originally Posted by V.Narayan

A good starting point I would say. Too many Govt officials work with a sense of immunity. I don't think this has much to do with cost savings though in a small way that may result. For too many decades Govt officers and clerks work with a sense that in any case they cannot be brought to task in any meaningful way. I don't say all are lazy and nasty. But the 20% that are need to go. Sorry for the rant.

Sir, I understand what you are trying to say and appreciate the feelings behind it. Most people in India would know.
But.... this is exactly the kind of blunder centre should not do now.

Please think about it -- in 2020, there is literally one group of people who do not have to worry about future livelihood and it is Govt officials. They consume because they can.
Since there is no formal definition of "corrupt" or "inefficient", all this is going to do is make everybody without a formal political connection to feel threatened in their livelihood and, reduce consumption irrespective of whether they are fired or not.
There is a serious problem in policy making if we think about this.
A govt servant with 30 years would have joined in early 90s, ie. previous pension regime -- almost 50% of his pay would still need to be provided as pension. Retiral benefits which are otherwise spread all across the coming years need to be given out right now ( leave encashments etc).
If he/she started working in early 90s, most of them would be in early to mid 50s, with college age kids. No, I am not bringing up a "compassionate" poor child argument -- but, children in that age, consume. They watch movies, pay fees, go out a lot, buy a lot of clothes, eat a lot outside. With this move, centre would not just affect the employee's spending habit, but his children's too.

[vrprabhu]

Originally Posted by DigitalOne

How centre will meet the constitutionally guaranteed 'compensation part' is to be seen....

Great clarity. I am not worried about the 'give and take' - I am worried about how they will raise the money to pay the compensation, which is what I have stated earlier - i.e. it is the tax payer who will foot the bill.

Originally Posted by Rahul Bhalgat

And what the Centre has failed to give is the compensation cess amount

It is more of a grant. And the Centre has not yet failed - they have indicated that they are 'unlikely to pay'....

Originally Posted by ashokrajagopal

... Everybody knows demand needs to pick up, that is why you see all kinds of suggestions ranging from doubling MNREGA on the one side to completely doing away with Income tax on the other side.

Either way, that primarily requires an admission that there is a problem. But the government never admitted despite a secular stagnation for the last 2 years; always looking for those temporary "green shoot" numbers

Agree. BUT (this is a big 'but' ) wasn't the demand growth skewed for the past several years now? Was there really a robust development in the country that led to this demand? I don't think so - a simple look at the actual capex in the last few years will give a good picture. (In fact, a good number of big ticket cases in NCLT were settled with huge hair cuts upwards of 60% - so the original investment value is degraded to <40%; leave alone recovering the interest, even principal would not have been recovered by the lenders / creditors).

Fully concur with the next part - the green shoots appear to be stunted at birth!!

As regards the last point in the post - compulsory retirement - don't fully agree with you. But a discussion on this will deviate from the main topic. (I agree about the pay-out and pension burden part, but what about accountability? It is the tax payer's money that feeds them, doesn't it?)

[DigitalOne]

Originally Posted by Rahul Bhalgat

So, the States are getting the SGST amount as well as their share of IGST and CGST (if any).

Yes. For intra (within) state transactions, CGST rate and SGST rate will be equal and will total for the total taxes on that goods/service. You can see this in any of your retail bills.

For inter state transactions, centre collects it, transfer half of it to CGST account and transfers other half to the SGST account consumer/destination state. The IGST account of the CG is therefore a kind of temporary account.

Originally Posted by vrprabhu

I am worried about how they will raise the money to pay the compensation, which is what I have stated earlier - i.e. it is the tax payer who will foot the bill.

Yes. The compensation cess is likely to continue for some more time. Auto buyers will be paying 1%-15% cess over the 28% GST.

[ashokrajagopal]

Originally Posted by vrprabhu

Agree. BUT (this is a big 'but' ) wasn't the demand growth skewed for the past several years now? Was there really a robust development in the country that led to this demand? I don't think so - a simple look at the actual capex in the last few years will give a good picture. (In fact, a good number of big ticket cases in NCLT were settled with huge hair cuts upwards of 60% - so the original investment value is degraded to <40%; leave alone recovering the interest, even principal would not have been recovered by the lenders / creditors).

Fully concur with the next part - the green shoots appear to be stunted at birth!!

I have no contention there -- we have had this globalization led development related discussions in this thread; I tend to be on the side that what we have is all skewed and is a future worry. Arguably, the growth story of India was most pronounced in 2000-08 time frame, and I am of the opinion that the global supercycles helped a lot.
Now, that era is over for a few years and India is still chasing what we could have done during that time.

As regards the last point in the post - compulsory retirement - don't fully agree with you. But a discussion on this will deviate from the main topic. (I agree about the pay-out and pension burden part, but what about accountability? It is the tax payer's money that feeds them, doesn't it?)

The one opinion I have for that is that Economics is not a science. There is no universality to any law/theorem/principle in economics. The time and space in which it is applied matters more than anything else.

It is of course good to reduce tax payer's burden, but why would we do that during a once in a century pandemic where everyone is worried about economy slowing down ? The effort required, the political and financial capital required to do these "reforms" need to be justified in the present.

May be after we get out of covid era and growth picks up to pre covid numbers, yes.

Right now, Government needs money. This is the problem at hand. It can go austere (job cuts, pension cuts, spending cuts), tax or borrow. Going into austerity has near zero chance of reviving any kind of demand. It is just removing some requirement of money and kind of like pretending there was no requirement.