tax ruling emboldens indian states against modis government - Tax ruling emboldens Indian states against Modi's government

NEW DELHI (BLOOMBERG) – Several Indian states are pressuring Prime Minister Narendra Modi’s government to extend a programme to continue compensation for losses from a goods and services tax or risk a stalemate in attempts to further simplify the structure.

It poses the biggest challenge yet to the country’s most significant tax reform in decades.

Finance ministers from the opposition-led Kerala, West Bengal and Chhattisgarh have said they will raise the issue at a meeting of the GST Council this month.

Tamil Nadu and Bihar, a state governed by Mr Modi’s ally, will also support the push, according to people with knowledge of the matter, who asked not to be identified as they aren’t authorised to speak with the media.

States are emboldened to take on the federal administration after the Supreme Court ruled last month that the GST Council’s decisions are non-binding.

If the Council, headed by federal finance minister doesn’t agree, the states could unilaterally raise revenue with other taxes that goes against a push to standardise such duties across the countries.

“This is not an ego tussle between the centre and states,” said Mr T.S. Singh Deo, finance chief in the mineral-rich Chhattisgarh state in central India. “The idea is to ensure increase in revenue and if it doesn’t happen through the council then it will have to be from other avenues. This was supposed to be ‘one nation one tax’ and not ‘one nation one budget.'”

Under the GST law, the federal government has to compensate states for five years through June 2022 for giving up their tax-making powers and gaining their support for the consumption tax.

The programme cost US$103 billion (S$142.87 billion) over the period. Several states want this to continue as it has become a key source of income to pay for salaries, subsidies and infrastructure development.

Mr Modi’s Bharatiya Janata Party and its allies rule 17 out of India’s 28 states, as well as one of three federal territories that have an elected legislature. Five other provinces are directly administered by the federal government.

The senior government secretaries of Tamil Nadu and Bihar didn’t respond to emailed requests for comment. India’s Finance Ministry spokesman didn’t immediately respond.

Giving in to states’ demands may complicate finances at a time when Asia’s third-largest economy is grappling with soaring prices as recovery gathers pace after the pandemic-induced slump.

The government’s US$26 billion inflation-fighting plan risks widening fiscal deficit for the current year to 6.8 per cent of gross domestic product, from 6.4 per cent, according to analysts at Nomura Holdings.

The federal government has paid GST compensation until end-May to the states with only the June payment pending.