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Speaker Meira Kumar has urged political parties to arrive at a consensus on the women’s reservation bill. The 2008 Bill has the following main features. 1. It reserves one-third of all seats in Lok Sabha and Legislative Assemblies within each state for women. 2. There is quota-within-quota for SCs, STs and Anglo-Indians. 3. The reserved seats will be rotated after each general elections – thus after a cycle of three elections, all constituencies would have been reserved once. This reservation will be operational for 15 years. This Bill has had a chequered history. A similar Bill was introduced in 1996, 1998 and 1999 – all of which lapsed after the dissolution of the respective Lok Sabhas. A Joint Parliamentary Committee chaired by Geeta Mukherjee examined the 1996 Bill and made seven recommendations. Five of these have been included in the latest 2008 Bill. These are (i) reservation for a period of 15 years; (ii) including sub-reservation for Anglo Indians; (iii) including reservation in cases where the state has less than three seats in Lok Sabha (or less than three seats for SCs/STs); (iv) including reservation for the Delhi assembly; and (v) changing “not less than one-third” to “as nearly as may be, one-third”. Two of the recommendations are not incorporated in the 2008 Bill. The first is for reserving seats in Rajya Sabha and Legislative Councils. The second is for sub-reservation for OBC women after the Constitution extends reservation to OBCs. The 2008 Bill was referred to the Standing Committee on Law and Justice. This Committee failed to reach a consensus in its final report. The Committee has recommendedthat the Bill “be passed in Parliament and put in action without further delay. Two members of the Committee, Virender Bhatia and Shailendra Kumar (both belonging to the Samajwadi Party) dissented stating that they were not against providing reservation to women but disagreed with the way this Bill was drafted. They had three recommendations: (i) every political party must distribute 20% of its tickets to women; (ii) even in the current form, reservation should not exceed 20% of seats; and (iii) there should be a quota for women belonging to OBCs and minorities. The Standing committee considered two other methods of increasing representation. One suggestion (part of election commission recommendations) was to requite political parties to nominate women for a minimum percentage of seats. The committee felt that parties could bypass the spirit of the law by nominating women to losing seats. The second recommendation was to create dual member constituencies, with women filling one of the two seats from those constituencies. The Committee believed that this move could “result in women being reduced to a subservient status, which will defeat the very purpose of the Bill”. It is interesting to note that the Committee did not reject the two recommendations of the Geeta Mukherjee Committee that are not reflected in the Bill. The Committee concluded that the issue of reservations to Rajya Sabha and Legislative Councils needs to be examined thoroughly as the upper Houses play an equally important role under the Constitution. Incidentally, it is not possible to reserve seats in Rajya Sabha given the current system of elections to that house (see Appendix below). On the issue of reservations to OBC women, the Committee said that “all other issues may be considered at an appropriate time by Government without any further delay at the present time in the passage of the Bill”. Though the Bill does not have a consensus – it has been opposed by SP, RJD and JD(U) – most parties have publicly expressed their support for it. The government will likely not find it difficult to muster two-third support in each House of Parliament were the Bill be taken up for consideration and passing. It would be interesting to see whether the Bill is brought before Parliament in the upcoming Budget Session. Appendix: Impossibility of Reservation in Rajya Sabha Article 80of the Constitution specifies that members of state assemblies will elect Rajya Sabha MPs through single transferable vote. This implies that the votes are first allocated to the most preferred candidate, and then to the next preferred candidate, and so on. This system cannot accommodate the principle of reserving a certain number of seats for a particular group. Currently, Rajya Sabha does not have reservation for SCs and STs. Therefore, any system that provides reservation in Rajya Sabha implies that the Constitution must be amended to jettison the Single Transferable Vote system.
Later this week, the GST Council will meet to discuss the issue of GST compensation to states. The central government is required to compensate states for any loss of revenue they incur due to GST. The Centre must pay this compensation on a bi-monthly basis, but over the past one year these payments have been delayed by several months due to lack of funds. The COVID-19 pandemic and the consequent lockdown have amplified the issue manifold, with both centre and states facing a revenue shortfall, limiting the ability of the Centre to meet states’ compensation needs.
Why is the Centre required to compensate states for GST?
With GST implementation in 2017, the principle of indirect taxation for many goods and services changed from origin-based to destination-based. This means that the ability to tax goods and services and raise revenue shifted from origin states (where the good or service is produced) to destination states (where it is consumed). This change posed a risk of revenue uncertainty for some states. This concern of states was addressed through constitutional amendments, requiring Parliament to make a law to provide for compensation to states for five years to avoid any revenue loss due to GST.
For this purpose, the GST (Compensation to States) Act was enacted in 2017 on the recommendation of the GST Council. The Act guarantees all states an annual growth rate of 14% in their GST revenue during the period July 2017-June 2022. If a state’s GST revenue grows slower than 14%, such ‘loss of revenue’ will be taken care of by the Centre by providing GST compensation grants to the state. To provide these grants, the Centre levies a GST compensation cess on certain luxury and sin goods such as cigarettes and tobacco products, pan masala, caffeinated beverages, coal, and certain passenger vehicles. The Act requires the Centre to credit this cess revenue into a separate Compensation Fund and all compensation grants to states are required to be paid out of the money available in this Fund.
How much compensation is provided to states?
For 2018-19, Centre gave Rs 81,141 crore to states as GST compensation. However, for the year 2019-20, the compensation requirement of states nearly doubled to Rs 1.65 lakh crore. A huge increase in requirement implies that states’ GST revenue grew at a slower rate during 2019-20. This can be attributed to the economic slowdown seen last year, which resulted in a nominal GDP growth of 7.2%. This was significantly lower than the 12% GDP growth forecast in the 2019-20 union budget (Figure 1).
Figure 1: GDP growth rate (2017-21)
Sources: Union Budget Documents; MOSPI; PRS.
In 2019-20, the gross GST revenue (Centre+states) increased by just 4% over the previous year. Despite this, due to the compensation guarantee, all states could achieve the growth rate of 14% in their GST revenue – much higher than the overall growth in GST revenue. However, there was a delay in payment of compensation from Centre. More than Rs 64,000 crore of the compensation requirement of states for 2019-20 was met in the financial year 2020-21.
What led to a delay in payment of compensation to states?
In 2019-20, the delay in payment was observed due to insufficient funds with Centre for providing compensation to states. These funds are raised by levying a compensation cess on the sale of certain goods, some of which were affected by the economic slowdown. For instance, in 2019-20, sales of passenger vehicles declined by almost 18% and coal offtake from domestic coal companies reduced by nearly 5%, over the previous year. As a result, cess collections registered a growth of just 0.4% in 2019-20 (Figure 2), against the 104% increase seen in the compensation requirement of states. This resulted in a shortfall of funds of nearly Rs 70,000 crore.
Figure 2: Cess collections insufficient for providing compensation
Note: In 2017-18, GST was implemented for only nine months. Compensation amount shown may not match with the amount released in that financial year because of delay in releases.
Sources: Union Budget Documents; Ministry of Finance; GST Council; Lok Sabha Questions; PRS.
How can compensation be paid to states if cess collections are insufficient?
The shortfall in collections for 2019-20 was met through: (i) surplus cess collections from previous years, (ii) partial cess collections of 2020-21, and (iii) a transfer of Rs 33,412 crore of unsettled GST funds from the Centre to the Compensation Fund. These unsettled funds are GST collections, generated in 2017-18 from inter-state and foreign trade, that have not yet been settled between centre and states.
In the 2020-21 budget, the Centre has estimated a 10% growth in nominal GDP. However, due to the impact of COVID-19 and the lockdown, the actual growth in 2020-21 is likely to be much lower. In such a scenario, states’ GST revenue would also be much lower than expected, thus leading to a higher compensation requirement. However, the ability of Centre to pay compensation depends on the cess collections, which are also getting impacted this year. For instance, cess collections during the period Apr-Jun 2020 have been 41% lower in comparison to the same period last year. Moreover, of the Rs 14,482 crore collections made during this period, Rs 8,680 crore has been likely used up for paying compensation for 2019-20.
Note that under the GST (Compensation to States) Act, 2017, Centre can provide compensation to states only through the money available in the Compensation Fund. The Union Finance Minister, in her budget speech in February 2020, clarified that transfers to the Fund would be limited only to collections of the GST compensation cess. Despite a shortfall of money in the Compensation Fund, the Centre is constitutionally obligated to meet states’ compensation requirement for a period of five years.
Various measures have been suggested to address the issue of shortfall in the Fund, either by reducing the compensation payable to states (which would require Parliament to amend the Act following GST Council’s recommendation) or by supplementing the funds available with Centre for providing compensation to states. The Act allows the GST Council to recommend other funding mechanisms/ amounts for credit into the Compensation Fund. For example, one of the measures proposed for meeting the shortfall involves Centre using market borrowings to pay compensation to states, with the idea that these borrowings will be repaid with the help of future cess collections. To enable this, the GST Council may recommend to Centre that the compensation cess be levied for a period beyond five years, i.e. post June 2022.
Impact on states post 2022
In 2019-20, except for a few north-eastern states, most states saw their compensation requirements increase multifold by 2-3 times, over the previous year’s figures. Table 1 shows the compensation requirement of states for the years 2018-19 and 2019-20. Six states (Delhi, Gujarat, Karnataka, Maharashtra, Punjab, and Tamil Nadu) accounted for 52% of the total requirement of compensation for 2019-20. Further, in some states such as Punjab and Delhi, compensation grants form a significant share of the overall revenue receipts (20% and 16% resepctively).
Note that states have been guaranteed compensation only for a period of five years. After June 2022, states dependent on compensation will observe a revenue gap due to a cut in these grants coming from Centre. States have roughly two years to bridge this gap with other tax and non-tax sources to avoid a potential loss of revenue, and a consequent fall in the size of their state budget, which could adversely affect the economy. To what extent will such concerns be alleviated remains to be seen based on the course of action decided by the GST Council.
Table 1: GST compensation requirement of states for 2018-19 and 2019-20 (in Rs crore)
|
State |
2018-19 |
2019-20 |
% increase in compensation requirement |
||
|
Amount |
As a % of revenue |
Amount |
As a % of revenue* |
||
|
Andhra Pradesh |
0 |
- |
3,028 |
3% |
- |
|
Assam |
455 |
1% |
1,284 |
1% |
182% |
|
Bihar |
2,798 |
2% |
5,464 |
4% |
95% |
|
Chhattisgarh |
2,592 |
4% |
4,521 |
7% |
74% |
|
Delhi |
5,185 |
12% |
8,424 |
16% |
62% |
|
Goa |
502 |
5% |
1,093 |
9% |
118% |
|
Gujarat |
7,227 |
5% |
14,801 |
10% |
105% |
|
Haryana |
3,916 |
6% |
6,617 |
10% |
69% |
|
Himachal Pradesh |
1,935 |
6% |
2,477 |
8% |
28% |
|
Jammu and Kashmir |
1,667 |
3% |
3,281 |
5% |
97% |
|
Jharkhand |
1,098 |
2% |
2,219 |
4% |
102% |
|
Karnataka |
12,465 |
8% |
18,628 |
11% |
49% |
|
Kerala |
3,532 |
4% |
8,111 |
9% |
130% |
|
Madhya Pradesh |
3,302 |
3% |
6,538 |
4% |
98% |
|
Maharashtra |
9,363 |
3% |
19,233 |
7% |
105% |
|
Meghalaya |
66 |
1% |
157 |
2% |
138% |
|
Odisha |
3,785 |
4% |
5,122 |
5% |
35% |
|
Punjab |
8,239 |
13% |
12,187 |
20% |
48% |
|
Rajasthan |
2,280 |
2% |
6,710 |
5% |
194% |
|
Tamil Nadu |
4,824 |
3% |
12,305 |
7% |
155% |
|
Telangana |
0 |
- |
3,054 |
3% |
- |
|
Tripura |
172 |
1% |
293 |
3% |
70% |
|
Uttar Pradesh |
0 |
- |
9,123 |
3% |
- |
|
Uttarakhand |
2,442 |
8% |
3,375 |
11% |
38% |
|
West Bengal |
2,615 |
2% |
6,200 |
4% |
137% |
Note: Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim did not require any compensation in 2018-19 and 2019-20.
*Revenue for the year 2019-20 does not takes into account those GST compensation grants which were payable to states in 2019-20 but were released by Centre in the year 2020-21. The percentage figures would be slightly lower if such grants are included in 2019-20 revenue.
Sources: State Budget Documents; Ministry of Finance; Lok Sabha Questions; CAG; PRS.
