State governments are now feeling the pinch of having sacrificed their sovereignty for a national goods and services tax (GST), which subsumed 17 central and state indirect taxes and left little room for states to raise revenue on their own.

In an interview with Mint, Delhi deputy chief minister Manish Sisodia said that there is a limit to raising taxes on items not covered by GST such as liquor, petrol and diesel. In fact, liquor and auto fuels have been the first resort for both the central and state governments to mobilize revenue, as it is easy to levy tax on sin goods and, in case of auto fuels, the pollution tag.

“There is a limit to that. It is a time of crisis and taxes will need to be moderate,” said Sisodia.

This points to the desperation among states, as decisions at the GST Council can only be made when all the states and the Centre arrive at an agreement.

The GST Council is India’s first federal institution where sovereignty of the Centre and the states in relation to indirect taxes have been pooled together, former finance minister and first chairman of the Council Arun Jaitley had noted in March 2017.

Sisodia said due to the states’ limited revenue-raising ability, the Centre should borrow and fully make up for their GST revenue shortfall, instead of expecting states to borrow to meet their financial needs.

Delhi, along with Punjab, Kerala, Telangana and West Bengal, has rejected the two options proposed by the Centre at the GST Council meeting last month to fund their GST revenue gap.

“Delhi’s revenue in the first four months has fallen below the target by 57%. We are now at 43%. No state can survive with this kind of revenue. It is hard to pay salaries to our staff,” Sisodia said.

In an interview published in Mint on Thursday, Kerala finance minister Thomas Isaac had said that GST compensation was the “biggest tension point in the federal system”. Earlier this week, Punjab finance minister Manpreet Singh Badal said there were flaws in the GST system and it should be redesigned.

Sisodia said the national capital prefers to open up the economy further with safeguards as it was key to restoring livelihoods and revenue stream. “We need revenue and till such time economic activities, such as construction, do not happen, people will remain unemployed. 40,000-50,000 people work in government projects (on contract). If the government cannot pay them, their livelihood is at risk,” said Sisodia.

While the non-BJP-ruled states claimed they have a right to be compensated by the Centre at an annual GST revenue growth of 14%, as assured at the time of the roll out of GST, the Centre is of the view that the assurance covers only revenue shortfall due to the tax reform, but not the impact of covid-19 on state revenues.

Sisodia also ruled out any middle path. “It (states’ right to GST compensation) is set in law. How will states survive?… The GST Council will not agree to any unconstitutional proposal. There cannot be a mid-point in a path of lie. Getting betrayed 50% by the Centre is not an option,” he said.

The Delhi deputy CM said GST requires an overhaul. According to him, the unfinished tasks include setting up of a process for the resolution of disputes between the central and state governments, finalizing the tax return filing process and matching of input tax credit.

“GST needs a revamp. We need to fill the gaps in GST for a comprehensive tax system,” he said.

Sisodia said at present, there was no room for an increase in tax rates or GST cess.

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