Centre sacrificed large amount of GST revenue to compensate states: Former CEA

New Delhi: The Centre has sacrificed a large portion of revenue from Goods and Services Tax (GST), up to 1 per cent of GDP, every year since the rollout of the new indirect tax regime to fund a 14 per cent compensation guarantee provided to states, former Chief Economic Advisor Arvind Subramanian said on Thursday. Subramanian, who was actively involved in the implementation of the GST regime, also said that it would not be advisable at this point in time to bring petrol and alcohol under the GST. GST was rolled out on July 1, 2017, subsumed 17 taxes and 13 cesses into a 5-tier structure, thereby, simplifying the tax regime.

Addressing an event organised by the Centre for Social and Economic Progress(CSEP), Subramanian further said that the GST is a remarkable reflection of cooperative federalism and a counterexample to the narrative of fiscal centralisation by the Centre in the last decade. Subramanian, currently a senior fellow at Peterson Institute for International Economics, said that the GST has worked broadly on expected lines to benefit the poorer states. "The centre has lost 0.5-1 per cent of GDP in revenue every year in the last seven years," he said, adding that bringing the cess into a rationalised rate structure can ensure that compensation may not be necessary in future.

The eminent economist pointed out that GST revenues have come back to the pre-GST level, despite rate cuts showing that collections have improved and indirect taxation has become a bit more progressive. Subramanian further said that reforms in the GST structure are deeply necessary but highly unlikely to happen. "What you could have done at the founding moment...GST rates could have been simplified at the founding moment," he observed. On bringing alcohol and petroleum under the GST regime, Subramanian said, "I do not think it is politically advisable now to press states to give up more fiscal sovereignty."

The GST compensation cess was discontinued after fiscal 2021-22. The gross GST collection increased 8 per cent to Rs 1.74 lakh crore in June. GST contributes significantly to state revenues - states receive 100 per cent of SGST collected in that state, approximately 50 per cent of IGST (i.e. on inter-state trade). A significant portion of CGST -- 42 per cent -- is devolved to the states based on the Finance Commission's recommendations.