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Home / India News / GST compensation: ₹1.88L-cr needed to recoup states’ shortfall

GST compensation: ₹1.88L-cr needed to recoup states’ shortfall

As per GST law, states have been assured a 14% increase in their annual GST revenue, but GST collection in 2020-21 is unlikely see any growth, they added.

india Updated: Jul 30, 2020 06:51 IST
Rajeev Jayaswal
Rajeev Jayaswal
Hindustan Times, New Delhi
The union finance ministry did not respond to e-mails seekinmg comment.
The union finance ministry did not respond to e-mails seekinmg comment.(Mint)

The amount of compensation required to be paid to states for their revenue shortfall in the current financial year is expected to be at least Rs 1.88 lakh crore even if the Goods and Services Tax (GST) collection remains at the same level as last year, around Rs 12 lakh crore, three people with direct knowledge of the matter said. In 2019-20, the Centre paid a compensation of Rs 1,65,302 crore to the states; the last instalment of this was paid on this month.

On Wednesday, The Hindu reported that revenue secretary Ajay Bhushan Pandey told the Parliamentary Standing Committee on Finance on Tuesday that the government may not be in a position to pay compensation to states this year.

The people cited in the first instance sad that this is likely given sluggish economic activity on account of the Covid-19 pandemic , the national lockdown that ended on May 31, and localised lockdowns that are still ongoing in some parts of the country.

As per GST law, states have been assured a 14% increase in their annual GST revenue, but GST collection in 2020-21 is unlikely see any growth, they added.

“There is virtually no money left to pay compensation to states from April 2020,” one of the three said. The states were paid Rs 1,65,302 crore GST compensation in 2019-20, even as total cess collection for the fiscal year was a mere Rs 95,444 crore. The gap was met from the balance in the compensation cess account of previous years and some money was transferred from the consolidated fund of India, he added.

At the time of introducing the new indirect tax regime, the GST law assured states a 14% increase in their annual revenue for five years (up to July 1, 2020) and the Centre committed to meet any shortfall in revenue through the cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products.

According to a note circulated in the 40th GST Council meeting held on June 12, compensation cess collected in 2017-18 was Rs 62,612 crore, rose to Rs 95,081 crore in 2018-19 and further to Rs 95,444 crore in 2019-20. Compensation paid in 2017-18 was however, less than the total collection at Rs 41,146 crore and Rs 69,275 crore in 2018-19.

The second person, who is a legal expert, said the law provides that the compensation will be paid out of the GST Compensation Fund, specifically created for this purpose. “Nowhere in the Compensation Act has been stated that in regard to a situation of shortfall in the GST Compensation Fund, the gap will be met by the central government,” he said.

“It is now up to the GST Council to find a solution – how to augment revenue collection. Theoretically, the options before the Council for meeting the shortfall could be to rationalise tax rates, include more items under the compensation cess or increase the compensation cess, or recommend higher borrowing by states to be repaid by the future collection into the compensation fund,” the third person said.

Finance ministers of some states, however, said paying compensation is the responsibility of the Union government. “According to news reports the hearing before Standing Committee on Finance, Centre has taken the stand that GST Compensation can’t be paid and present arrangements be revised by Council. Such a brazen betrayal of federal trust! Convene the Council meeting immediately as promised,” Kerala finance minister Thomas Isaac said in a tweet.

The union finance ministry did not respond to e-mails seekinmg comment. GST Council is the apex federal body that takes all decisions related to the indirect tax. It is chaired by the Union finance minister. Finance ministers of states and union territories are its members and the council decisions are often unanimous.

The third official said the Council will meet in August to resolve this matter. “This is not a systemic issue. The compensation cess fund has depleted because of the pandemic and not due to any system flaw in the GST regime. Covid-19 was an act of god, a force majure. The Council will take an appropriate view on this matter soon.”

Pratik Jain, partner and leader of the indirect tax practice at PwC India said that a dialogue between the Centre and states is the only viable solution. “Increasing the ambit or rate of cess may not be a practical solution at this stage. The only viable option seems to be a renegotiation between the Centre and states about the quantum and period of compensation. Eventually, we will have to find a way to ensure that state finances are self sustainable and this compensation is not needed at all.”

Abhishek Jain, tax partner at consultancy firm EY India said, “With expectations of lower cess collections in the next couple of months with already muted collections in the first quarter, the government possibly will need to explore avenues for funding the shortfall -- through increased tenure of compensation cess levy or rate increase in later years, etc.”

According to government data, the GST collection in first three months of current financial year saw a decline of about 41% at Rs 1,85,220 crore compared to Rs 3,14,095 crore in the same period last year.

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