States fear they are inching closer to a fiscal cliff with the expiry of the five-year GST compensation period.(HT Photo)
States fear they are inching closer to a fiscal cliff with the expiry of the five-year GST compensation period.(HT Photo)

GST Council to weigh states’ fiscal woes

  • The states are demanding the extension of the GST compensation period beyond June 2022 and compensation of the GST shortfall of states through a central grant instead of debt financing.
By Gireesh Chandra Prasad, Hindustan Times, New Delhi
PUBLISHED ON MAY 28, 2021 06:48 AM IST

The fiscal woes of state governments is expected to be a major friction point when the Goods and Services Tax (GST) Council meets on Friday with states likely to focus on the Union government’s practice of not sharing cess revenue and the expiry of GST compensation in June 2022.

States, which are facing a major shortfall in revenue, fear that they are inching closer to a fiscal cliff with the expiry of the five-year period for GST compensation. Ministers of seven states that are not ruled by the Bharatiya Janata Party have already discussed the fiscal issues and are set to make demands at the full-day virtual meeting, Congress leader and Punjab finance minister Manpreet Singh Badal said at a press conference on Thursday. The issue was discussed at a meeting attended by Badal, as well as ministers from West Bengal, Tamil Nadu, Kerala, Rajasthan, Chhattisgarh, and Jharkhand.

The states are demanding the extension of the GST compensation period beyond June 2022 and compensation of the GST shortfall of states through a central grant instead of debt financing, which is reflected in the fiscal deficit of states.

The Centre had borrowed 1.1 trillion in FY21 to transfer to states as GST compensation under a special arrangement, but it is not part of the Centre’s fiscal deficit. If the arrangement is continued in FY22, the borrowing requirement would be 1.58 trillion, according to calculations made by central government and state officials that are expected to be placed before the Council on Friday, said a person briefed about the discussions.

Badal said his understanding was that the borrowing arrangement was only for FY21 and that there was no need to continue it. “Opposition states will tomorrow ask for an outright grant and not borrowing,” he said.

The minister also criticized the Centre’s practice of raising revenue by way of cess, especially on petrol and diesel, which is not shared with states. “We have become an expensive economy because of high oil price,” he said. Neither the states nor the economy has benefited because of the fuel cess, he said.

In the case of petrol and diesel, a portion of the taxes levied by the Centre as additional excise duty is collected as road and infrastructure cess. Also, in the FY22 budget, the Centre rejigged the import duty structure to replace a part of the customs duty with agriculture and infrastructure development cess.

Odisha CM Naveen Patnaik has urged the Centre to share with states a part of the funds raised as cess and surcharges.

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