Keep promises to states

In the over 70-year-long history of independent India, there have been several episodes of economic slowdowns but none might have achieved what the current one did — adversely affect the financial sovereignty of states. State governments had agreed to forgo their constitutional sovereignty to levy the collectively administered the Goods and Services Tax (GST) in 2017 on certain conditions. One of them was that the central government would compensate states for any shortfall in revenue growth below 14 per cent for the first five years.

Parliament passed the GST Compensation Cess Act to collect additional taxes on the sale of certain luxury goods and “sin” goods for offsetting the losses incurred by the states in forgoing their financial sovereignty. The promise to compensate the states was made by India’s sovereign entity and should be held sacrosanct under all circumstances — only then will people and businesses have faith in the government. Nevertheless, the Narendra Modi government appears to be keen to renege on its promise on the pretext of lower indirect tax collections, which plummeted below Rs 1 lakh crore in three of the last four months.

While the effect of economic slowdown could be felt on every section of the society, Mr Modi should be mindful of the ramifications of the Centre breaking its promises on the fiscal autonomy of states and the country’s federal polity.

It will kill the concept of cooperative federalism that he claimed to espouse since he came to power in 2014. Given the large number of revenue sources available to the Centre, it is imperative for New Delhi to stop financially strangulating states by denying them their rightful share of taxes. Trust in the government is most important for running an administration, and the day it is lost, anarchy will prevail.