A day after it released the GST compensation for March, the Centre reportedly told a parliamentary panel that the economy isn’t robust enough to bear the cost.

Nirmala Sitharaman at a press conference
Money GST Wednesday, July 29, 2020 - 19:02

The Centre reportedly told a parliamentary panel on Tuesday that it cannot pay GST compensation to states in the near future due to the COVID-19 pandemic. The Hindu reported that Finance Secretary Ajay Bhushan Pandey told the Parliamentary Standing Committee on Finance that it is no position to pay states based on the current revenue sharing formula. The reason for this is a slump in tax collections due to COVID-19 and the lockdown.

The meeting was convened to discuss the ‘Financing the Innovation Ecosystem and India’s growth companies’, when opposition members reportedly demanded that the issue of state’s GST compensation be discussed. Sources told the Economic Times that the economy is not robust enough to bear the cost.

GST collections

This comes a day after the Centre released the GST amount of Rs 13,806 crore to states for the month of March. In total, it has released Rs 1.65 lakh crore for 2019-20, it said.  The total amount of compensation released for 2019-20 is Rs 1,65,302 crore whereas the amount of cess collected during the year was Rs 95,444 crore.

The GST collections for the first quarter of the year (FY21) is at 59% of the revenue collected during the same quarter last year, a reduction of 41%.

Under the Goods and Services Tax (GST) law, states were guaranteed to be paid for any loss of revenue in the first five years of the GST implementation from July 1, 2017. The shortfall is calculated assuming a 14% annual growth in GST collections by states over the base year of 2015-16. GST compensation is to be paid out bi-monthly.

Under the GST structure, taxes are levied under 5%, 12%, 18% and 28% slabs. On top of the highest tax slab, a cess is levied on luxury, sin and demerit goods and the proceeds from the same are used to compensate states for any revenue loss.

A compensation cess is levied on imported goods to make up for the loss of revenue on account of GST implementation. Any shortfalls are supposed to be adjusted from the cess. However, whatever collections the Centre has raised through the compensation cess is not expected to be sufficient to balance out the shortfall of state revenues.

In the latest round of funds that the government released, it said that compensation cess collections fell by 42%, and were made up by using balance of cess from previous years, plus a transfer from the Consolidated Fund of India.

Impact on states

Many states have been vocal about the need for the GST compensation to be released on time, and the clamour has been growing since last year. In June, Telangana Finance Minister Harish Rao had told Union Finance Minister Nirmala Sitharaman that the government to release the funds as the state’s revenues had fallen deeply.

Kerala, too, has been vocal about issues pertaining to GST compensation. FM Thomas Isaac even told TNM that this year, Kerala’s Gross State Domestic Product (GSDP) would be 20% less than earlier anticipated.

This is more in focus as states have seen GST revenues falling sharply, especially in the months of April and May due to the lockdown. The financial capability of states is crucial at a time like this as expenses for states have gone up as they scramble to manage the rising coronavirus cases. While releasing the March dues may give states a breather, states continue to be cash strapped. If one recollects, even the MPLADS funds which would have been used for local-level work has been redirected to the Consolidated Fund of India.

The Hindu also reported that Congress MP Manish Tewari even pointed out the Union Budget may no longer be relevant as it was based on certain assumptions of revenue collections.

GST comprises around 60% of the tax revenues of states and hence the compensation plays an important role in the finances of the state. States were already hurt by the economic slowdown prior to the pandemic, and had raised their voices about limited financial sovereignty at the tail end of last year.

The main sources of revenue for the state government is from GST, Sales Tax, Motor Vehicle Tax, and Excise. Due to the lockdown, there was no collection on excise, motor vehicle tax, etc.

When alcohol sales opened up, states earned some revenue, but sales have been subdued after initial pent up demand. The price of fuel continues to go up as well but due to increased levies by the Centre, there is not much room to increase tax. But, what the states earned from these alone have not been enough.

States have deferred salaries, increased taxes on alcohol, and states such as Karnataka even decided to auction 12,000 housing sites to raise funds. 

Karnataka has seen its revenue reduce as much as 40% since April, but is still doing better than other states. Karnataka has reportedly made Rs 18,737 crore in GST between April and July so far, as opposed to Rs 27,766 crore in the corresponding period last year. Similarly, Telangana’s tax revenue fell to Rs 1,080 crore in April, as opposed to Rs 5,226.90 last year.

The Centre had said that GST mop up was 9% lower on a year-on-year basis in June, while it was 62% down in May and fell 28% in April. States like Andhra Pradesh, Telangana, Karnataka, Punjab, Chhattisgarh, Madhya Pradesh, Bihar and Assam witnessed growth in collection in June over last year. Many other states saw degrowth.

If states have to borrow, their fiscal deficit cannot exceed 5% of their GSDP. While the Centre did increase the borrowing limit of states from 3% to 5% for FY21 alone, borrowing beyond 3.5% is conditional and linked to reforms that states have to undertake.

In May, Kerala Finance Minister Thomas Isaac had said that they estimated revenue loss of over Rs 35,000 crore due to the COVID-19 pandemic, and added even by borrowing, the state would only get Rs 18,000 crore. “This is only half of our loss and hence we demanded that the GST component for the states be given in full,” he had said.

In The India Forum, M Govinda Rao, 14th Finance Commission member and former director of the National Institute of Public Finance and Policy wrote that states will implement these reforms only if they are politically easy, and if not, may forgo it and cut expenditure instead. “At a time when it is important to stimulate demand, the conditions stipulated for borrowing could lead to the unintended result of compressing capital expenditure,” he wrote.

States are at the frontline of fighting the pandemic and as they continue to see their tally of positive increase, the need for cash and adequate resources increases.

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