The central government may find itself in a difficult situation in trying to compensate the state governments for their shortfall in revenue due to the implementation of the GST. This was one of the ways of making the states agree to rolling out one of the largest tax reforms undertaken in the country since Independence. The arrangement made within the GST compensation law is that a cess would be levied on certain items considered luxury or sin like alcohol and cigarettes and this would be deposited in a special fund. There is no other avenue for the government to release the fund to the states as compensation for the revenue loss.
It is now expected that the central government will run short of the funds by ₹63,000 crore. The government has to delay the release of funds till the corpus builds up again.
Those monitoring these figures within the government are reported to have made a presentation at the GST Council meeting held last week. According to these figures the amount payable to the states will work out to ₹1,60,000 crore, by March 2020, whereas the amount available in the compensation cess account will be only in the region of ₹97,000 crore. This is based on the assumption that the overall increase in revenue from GST collections will go up by 5%.
GST revenues this year have been falling below the estimates and projections as a result of the slowdown in the economy. On top of that, the GST Council, in its previous meetings had decided to reduce the GST rates on several products in order to give a boost to the economy and some relief to consumers. This too resulted in lower amounts being collected as tax.
The only other way out would be to increase the GST rates. This is not an easy decision to make since it has political implications. States where elections are to be held will object to it.
The presentation referred to above goes on to say that this gap of ₹63,000 crore this year could widen to almost ₹1,30,000 crore in the next fiscal 2020-21 and go up to ₹2,00,000 crore in the year 2021-22. These figures are based on an increase in collections by 5%. It does not help much even if the mop up increases by 8%.
The central and state governments will have to find a way out of this situation.