JOIN USGST compensation: Karnataka betrayed
Karnataka is in a financial crisis. Chief Minister B S Yediyurappa said in his budget speech in March that the state’s financial health is not good. The reasons he enunciated are apt: the tax receivable from the Centre for 2019-20 as part of our devolution share decreased by 23%, or Rs 8887 crore. Moreover, at that point of time, the state hadn’t received its GST compensation of nearly Rs 3000 crore, which by March 31 became Rs 4,314 crore. Thus, for the year 2019-20, the Centre denied the state Rs 13,201 crore of its rightful share. A massive loss due to which many important departments are not getting funds and development has taken a backseat.
What led to this? It was purely due to the central government’s inept handling of the economy and its disastrous policies. Managing headlines became more important than an in-depth analysis of what was going on; facts and figures were being manipulated to suit these ends. The GDP calculation methodology was changed to present a rosier picture, to cover up the grim reality. The Central Statistical Organisation’s figures on growing unemployment was suppressed so that it didn’t harm the government’s image before the 2019 elections. Various opinions and reports on the true state of the economy were also suppressed.
The foolish decision taken by Prime Minister Narendra Modi to demonetise currency in November 2016 was a monumental blunder in itself. It brought our economy to a grinding halt, ruined commerce, and destroyed jobs. Then in a bid to display bold, decisive leadership, the GST was implemented without preparation and planning and was slammed down the nation’s throat, with multiple slabs, high rates and numerous technical glitches, leaving traders and businesses bewildered. The result: India suffered as tax revenues went down and the Centre’s tax devolution to Karnataka was reduced by Rs 8,887 crore. The state’s own remaining sources of revenues were also badly hit.
Finance Commission
For Karnataka, the next blow was the 15th Finance Commission (FC)’s recommendations, based on new criteria of income, population, forest area, revenue collection effort, etc. Karnataka became the biggest loser amongst all states. As per the 14th FC, our share was 4.71%; now, as per the 15th FC, it is down to 3.65%. Our share in total devolution has come down by a massive 1.06%. Thus, for the first year of the 15th FC, which is the current financial year 2020-21, out of the Government of India’s total tax divisible pool of Rs 8,55,176 crore, we are getting Rs 31,180 crore. Under the 14th FC, it would have been Rs 39,731 crore. Therefore, our loss is a massive Rs 8,551 crore. So, if you take an average growth of 10% per year, the cumulative loss due to the new criteria for the 5-year period of the 15th FC will be in the range of Rs 55,000 crore. This punishment meted out to Karnataka is mainly due to the fact that we are a performing state and for being effective in controlling our population growth. Thank you very much, Modiji.
Worse is the betrayal by Finance Minister Nirmala Sitharaman. The 15th FC, to offset the loss in devolution and revenue deficit grants, recommended to the Modi government a special grant of Rs 5,495 crore to Karnataka for 2020-21. Shockingly, however, Sitharaman, elected to the Rajya Sabha from Karnataka, rejected the recommendation and denied the state this grant.
GST Compensation
Since GST is a consumption-based tax, manufacturing states were bound to lose tax revenue. Thus, to bring about equity, the GST Compensation Cess was introduced from which states were to be compensated for the loss of revenue, which was expected to grow at 14% a year for five years. This compensation was to be paid until 2022.
Amongst all states, Karnataka was to receive the highest GST compensation. This is because we stood to lose the maximum due to GST implementation. GST compensation received so far:
2017-18 Rs 6,246 crore, 2018-19 Rs 10,800 crore, 2019-20 Rs 18,628 crore.
For 2020-21, Karnataka’s GST compensation is estimated to be Rs 31,674 crore. However, the state is yet to receive Rs 13,764 crore to compensate for GST revenue shortfall from April-July, and this is still being discussed in the GST Council. What should have been given automatically every two months has been denied.
With an already floundering Indian economy, worsened by the Covid-19 pandemic, the Modi government is attempting to escape its responsibility of paying GST compensation and is trying to shift the burden on to the states. These moves threaten the federal structure of our nation and is an act of betrayal by the Modi government. All the talk of “One Nation, One Tax” and “Cooperative Federalism” have remained mere slogans. The states are losing trust in the Union government.
After 2022, when the five-year transition period for GST ends, the compensation amount is going to be zero. This is going to blow a big hole in the state’s revenues. Our projected Revenue Deficit is Rs 30,743 crore in 2022-23 and Rs 46,831 crore in 2023-24. I know it sounds unbelievable, but it is true.
What is going to happen to Karnataka? If the GST compensation period is not extended, then Karnataka will go from being a revenue surplus state to being a revenue deficit state. Money will have to be borrowed to even take care of salaries, administration and to service debt, let alone for development activities. Essentially, we will be heading towards bankruptcy.
(The writer is Congress MLA and former KPCC president)