The Parliamentary Standing Committee on Finance recently reported the government’s inability to adhere to the present revenue sharing formula, hence, hindering them from distributing the Goods and Services Tax (GST) share of States. This information rattled the State’s efforts to increase public health-care measures to combat Covid-19.
Financial Struggles Amid Pandemic
As financial relief for states, the Centre had disbursed the final instalment of Rs. 13,806 crore of GST compensation for the Financial Year (FY) 2019-20. However, due to the pandemic, a revenue shortfall is expected for FY 2020-21. The repercussions of this are evident in the declining GST collections for March 2020. To aid in these challenging times, the GST Act facilitates revision of the compensation payment formula to State governments if the revenue collection plunges below a certain benchmark.
Understanding GST Compensation
Post the sanctioning of the 101st Constitution Amendment Act, 2016, GST came into effect from 1st July 2017. It led to the unification of numerous central and state indirect taxes into one single tax. To motivate reluctant States to embrace the new indirect tax regime, the Centre pledged compensation for a span of five years to pacify any fall in tax revenue due to GST implementation.
The GST Act guarantees states compensation for any revenue shortfall below 14% growth (base year 2015-16) for the initial five years ending in 2022. The payment is made with Compensation Cess every two months by the Centre to states. The Compensation cess, which is collected on the supply of select goods and services till 1st July 2022, is then remitted to the central government by all taxpayers.
Rising Concerns
The committee’s first meeting post lockdown raised eyebrows, as the topic of discussion was ‘Financing the Innovation Ecosystem and India’s Growth Companies’ rather than the state of the Indian economy amidst the pandemic. There is obscurity over the revenue shortfall this year, as well as queries on the efficiency of the government’s rescue package in the form of different Economic Stimulus.
The gap between the compensation cess and payment to states is expected to widen due to the economic contraction, which will reduce GST collections and compensation cess inflows. Payment of compensation to States for FY 2019-20 has already been problematic due to a shortfall of Rs. 70,000 crore between the Compensation Cess and payments owed to States. A solution was found by using cess balances from the first two years of GST implementation and funds from the Consolidated Fund of India through Integrated GST (IGST) funds.
Adding to the issue, the GST Council postponed its meeting, which was scheduled in July to discuss the reformation of the compensation formula.
Suggested Way Forward
To address the growing concerns, suggestions have been raised for the Centre to procure special loans against future GST cess accruals to fulfil its compensation promise to the States. In these trying times, it is essential for both; the Centre and the States, to gain clarity on their finances to more effectively combat the virus. It is also crucial to boost the economic growth of the country by exploring methods of increasing GST collections.
