Editorial 1 : A Grand GST Bargain
Context: Why a grand GST bargain with states is needed.
Compensation to States
- During the first five years of GST, there was a provision to compensate states for a loss of revenue, if any, measured against a 14% growth over their protected revenues in 2015-16.
- The source of this compensation given to states was a cess that the Centre levied and collected on the sale of specific goods.
- This compensation cess was initially levied for a five-year period. Subsequently, its levy was extended till March 2026, to service the loans raised during the Covid years for providing GST compensation to the states.
- In the 54th GST Council meeting held in September, the government announced its decision to repay the entire GST compensation loan, amounting to Rs 2.7 trillion, by January 2026.
Cess
- As defined in the Constitution of India, cess can be imposed only for a specific purpose and is outside the divisible pool of resources between the Centre and the states.
- In its September meeting, the GST Council recommended the formation of a Group of Ministers to study the future of the compensation cess beyond March 31, 2026, and how the surplus balance under the GST compensation fund would be used.
- If GST council decides to continue the levy the compensation cess (by whatever name it may deem fit) on specified items beyond March 2026, the purpose for that would need to be identified and a constitutional amendment may also be needed.
- The discontinuation of the compensation cess (without replacement by another tax/cess) would imply that the effective tax rates on demerit, sin and luxury goods (such as cigarettes, SUVs, pan masala, and tobacco items) would decline significantly.
- This appears somewhat unlikely as the government would want to tax these goods at high rates to discourage their consumption, suggesting that the compensation cess to continue, albeit in another form and with another name.
Option for Cess beyond Compensation Cess
- Compensation cess to be revamped into a new cess, for example, a green cess.
- The proceeds of this can be used to finance green infra projects and the energy transition requirements.
- The council would need to consider the proportion in which such a cess would be shared between the Centre and the state governments to help them meet their green transition commitments.
Petroleum, Oils and Lubricants (POL) products
- So far, petroleum, oils, and lubricants (POL) products remain outside the GST net.
- Rationale for bringing POL products within the ambit of GST
- To enable businesses to claim input tax credit on the same, which would help reduce costs and make them more competitive.
- The varied tax rates across states, the retail selling prices of items such as petrol and diesel differ substantially in various parts of the country.
- Flexibility in taxation on POL products enjoyed by the states gives them a some sort of fiscal autonomy, which the transition to GST had taken away.
- Bringing POL products under the GST will compress the states’ autonomy.
Way Forward
- A big bargain is needed to convince the states to bring POL products under the GST regime.
- The cess proceeds could be used for compensating the state governments for losses, if any, due to this transition.
Editorial 2 : QUAD’s Light Touch
Context: The Quad’s agenda may seem small, but its achievements are not.
Range of Agreements under QUAD
- The Quad forum finds new things to do in each meeting.
- In its sixth meeting in less than four years the Quad showcased a wide range of agreements — from curing cervical cancer to cooperation on cybersecurity, joint port development in the Indo-Pacific to the creation of an air logistics network in the region and laying the foundation for cooperation in bio technology and quantum computing.
Limitations
- Multiple Quad initiatives announced at each summit do not hold much significance.
- Critics in US want the Quad to become a more coherent and tight-knit organisation with a permanent secretariat and greater focus on military cooperation to deal with the principal strategic challenge in the Indo-Pacific i.e. the increasing assertiveness of Chinese power.
- India’s reluctance to join military alliances and its preference for an informal forum for Indo-Pacific cooperation that has shaped the expansive evolution of the Quad in the last four years.
Relevance and Significance of QUAD
- By focusing on the provision of public goods in the Indo-Pacific, the Quad has avoided being branded as the Asian Nato and inviting the ire of the regional states that had no desire to see an American-led military alliance against China.
- Quad has become more acceptable to the once sceptical ASEAN that now appreciates the Quad’s light touch on security.
- For India, which is the only non-ally of the US in the forum, the Quad has opened up an expansive agenda of regional cooperation with the US and its Asian allies.
- By formally separating Quad from their bilateral military cooperation, India and US have created much-needed political room to sidestep the traditional Indian emphasis on non-alignment and the US preference for security cooperation through military alliances.
Deterring Chinese Expansionism
- The US is developing more explicit military instruments such as the AUKUS, deeper trilateral security cooperation with South Korea and Japan, and lending military support for the Philippines.
- India and the US have steadily increased the range and depth of their military cooperation in the last few years.
- Sophistication of the Quad’s approach, individual and collective, towards China, may open more diplomatic space for engagement with Beijing.
Way Forward
Maybe China’s leader Xi Jinping is looking to buy himself some diplomatic space in order to focus on domestic economic challenges. This might give some opportunity for India and Quad to diplomatically reach out to China to check its stance.