The Kerala government on Wednesday, June 29, sent a letter to Union Finance Minister Nirmala Sitharaman requesting her to consider extending the period of GST compensation to states, which is set to expire at the end of this month, by another five years and to enhance the revenue sharing of tax to a 60:40 ratio between the states and the Union government. In the letter written by Kerala Finance Minister KN Balagopal, the southern state also urged the Union Minister, who is also the chairperson of the GST Council, to consider phasing out the "unusually higher rates of cesses and surcharges under Article 271" of the Constitution.
The communication was sent by Balagopal after the conclusion of the GST Council meeting in which about a dozen states pitched for extending by a few years the compensation paid to states for revenue lost from the implementation of the Goods and Services Tax (GST) regime.
The GST Council, the highest decision-making body of the indirect tax regime, however, did not take any decision at its meeting held in Chandigarh. A final decision is likely to be taken in the next GST council meeting in the first week of August, Finance Minister Nirmala Sitharaman said while talking to the media after the 47th GST Council meeting. "As many as 16 states spoke on GST compensation in today's meeting. Of this there were 3-4 states that said that they have to stand on their own and not depend on compensation," Nirmala said.
Meanwhile, the Kerala Finance Minister, in his letter, cites the adverse impact of the COVID-19 pandemic and resultant hard fiscal squeeze on states, "continuous reduction in the inter se share of Kerala from the divisible pool as well which causes a fall in central share" and the Union Finance Ministry's move to truncate open market borrowing ceilings of the states, as reasons behind the request. "To catalyse economic growth and lend support to sections of society who bore the brunt of the pandemic, the states cannot cut back their welfare spending at this moment and in the near future,” he said.
"With rigid borrowing conditions and downwardly inflexible expenditure, even if the revenue grows in a normal manner, the states' finances will face liquidity constraints. It is in this context that the continuance of the GST compensation becomes critically important for the states," the letter said.
Balagopal further said that in a cooperative federal set up, if the states' finances are in difficulty, the country's overall economic growth will also be stymied. "Hence, we request that the compensation should be continued till the situation shows definite signs of a turnaround. The issue should be considered as an agenda item in the forthcoming meeting of the GST Council," he said.
He also said that despite expert committees recommending a higher share for the states at a 60:40 ratio in the GST revenue, presently it was a 50-50 division. Balagopal said the states had agreed that State GST (SGST) be imposed at the same rate as Central GST (CGST) in the expectation of "legislatively guaranteed GST compensation". He further said that reduction in GST rates in 2017 has not led to any reduction in prices of goods and ordinary people did not benefit from the same.
The other reasons he cited for the continuation of the GST compensation period included — GST return system not fully materialised yet, cross verification of invoices not complete at present and in addition to that the share of central surcharges and cesses have been increasing from around 10% to 20% over the last decade which has led to reduction in share of states from the divisible pool as a percentage of the Gross Tax Revenue of the Union.
As per data on revenue growth collated for the Council meeting, only five out of 31 states/UTs — Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim — registered a revenue growth higher than the protected revenue rate for states under the GST in the financial year 2021-22. Puducherry, Punjab, Uttarakhand and Himachal Pradesh have recorded the highest revenue gap between the protected revenue and post-settlement gross state GST revenue in 2021-22.
Though states' protected revenue has been growing at 14% compounded growth, the cess collection did not increase in the same proportion, the COVID-19 pandemic further increased the gap between projected revenue and the actual revenue receipt, including a reduction in cess collection.
To meet the resource gap of the states due to the short release of compensation, the Union government borrowed Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans to meet a part of the shortfall in cess collection.
The Union government, last week, notified extension of the compensation cess, levied on luxury and demerit goods, till March 2026 to repay borrowing that were done in 2020-21 and 2021-22 to compensate states for GST revenue loss.