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Is demonetization going to stall GST?

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While the government is still battling critics and opposition both inside and outside the parliament, opposition States have opened another flank in fight with Center- GST. In the press conference yesterday, Financed Minister Arun Jaitly said that, opposition parties wanted to discuss the effects of Demonetization on GST rollout and leading the charge was Finance Minister of Bengal.

The argument presented by opposition States is, there was going to be revenue loss for them post GST rollout and they eventually came on board after Center promised to compensate any revenue loss. Now the new problem is, due to demonetization, they are experiencing economic slowdown and losing revenue even before GST roll out. Which puts roll out of GST in jeopardy.

In terms of economics, it might make sense, as previously people were spending their black money and generating income for the state governments by paying local taxes. Demonetization has slowed the spending if not stopped completely. Essentially, what the state governments are saying is, they are OK with people having black money as long as they spend it and pay taxes because it helps them raise money to meet their budgetary targets and mainly populist schemes.

Post GST, maximum of the revenue is going to go to Central government and they will distribute it among state governments as (even today’s) standard practice. But, today apart from funds from center, states themselves are able to collect taxes on their own in terms of local taxes including VAT, which will reduce significantly. It’s precisely why Tamilnadu had opposed GST and was only opposing state in Rajya Sabha.

From center and mainly PM Modi’s perspective, if the black money which is running a parallel economy can be brought into the system and it can serve dual purpose. First, more money will be deposited into banks which will eventually lead to lower interest rates. Second, money in formal economy will discourage without bill transactions, which will lead to more tax collection. Apart from these basic benefits, based on recent notifications, where 25% of the un-explained money deposited in Bank accounts will be locked-in for 4 years and will not get any interest will help him fund Pradhan Mantri Garib Kalyan Yojana.

With Demonetization now and later GST (if rolled out), states will have huge dependency on center for funds. We have seen what has happened in Andhra Pradesh, where Center has deprived Andhra for funds. We don’t know the exact reason behind this but there is sense that CM Naidu wants to utilize those funds for political purposes than utilizing for Andhra’s development. That’s going to be a scenario for all the non-BJP ruled states as they might have to explain the purpose for fund utilization, at-least that would be assumed even if the center has no intention of doing so. Non-BJP ruled States not trusting BJP ruled Center is not demerit of a reason.

Both States and Center have valid reasons to push through their agenda suiting to, from their perspective and it will be interesting to see how FM resolves this impasse. Will PM Modi leave it to FM alone to deal with it and have repeat of OROP (One Rank One Pension) or this time he will intervene soon enough to make sure government is in position to roll-out GST from April 1st, 2017, will know soon enough.

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