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If GST fails – Government Ready to Pay the Compensation

Mar 31, 2017

GST is going to offer a uniform tax structure in the country by merging diversified existing indirect taxes into single payable component. Removing old and several layers of taxes like VAT, excise duty, state-level tax, luxury tax, etc. is crucial as these create complexity both at the tax payers’ and receivers’ sides.

Various analytical studies have also revealed that GST will increase the GDP of India by 2%. Presently, consumer are paying 25-27% more for products due to different taxes levied by state & central govt. But, with the implementation of GST, the percentage will decrease to 18-20% and as a result the price of goods will be lower than before.

So as portrayed we see GST providing a lot of benefits. But is everything transparent? Are we actually going to gain?

Government is ready to pay the Compensation!

The negative side of GST implementation lies in the side effects of wrong accounting, cash flow, and uncertainties about business outcome for small and new ventures. But, keeping aside the negative impacts, GST will create a uniform tax system in India. The experts are confident that the investors will also not leave the country in hurry as the current Indian economy is in a recovery mode with controlled inflation, right fiscal consolidation, and low crude oil price.

Amidst this confusing environment, the government of India revealed in a record breaking announcement that if GST fails, it will provide compensation to the states for the next five years. To give this provision a constitutional framework, a separate compensation law will be required to be formed. The government has fixed the base year for GST compensation at financial year 2016; but, has not decided anything on the would-be-increased-percentage of the same when these 5 years will be over. There will also be a legally obligatory compensation agreement for states and it will support them against any loss.

Moving Forward

When a government is ready to take such hefty risks by paying compensation for exclusively replacing a complex and conventional indirect tax policy with a so called transparent, uniform, and technology based tax strategy like GST, it creates a confusing scenario for all of us. Question arises about the compensation sources of such big amount. Paying reimbursement to the states that too continuously for five years is indeed a luxurious plan especially after a financial crackdown due to recent demonetization in India.

So from where does the central government plan to get this compensation amount? – Our pockets!

If not, it is difficult to map ‘another’ legal source of such a big compensations!

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