The National Institute for Public Finance and Policy (NIPFP) has recently released a report on Goods and Services Tax (GST) compensation payable to states. The report states that the revenue shortfall could amount to about Rs. 1.95 lakh crore in the best-case scenario for the fiscal year 2020-21. This figure is notably lower than the Rs. 2.35 lakh crore estimated by the GST Council.
Understanding the GST Compensation
The Goods and Services Tax (Compensation to States) Act 2017 ensures that states will receive GST compensation during the transition period of its introduction. This is applicable if State GST revenue falls short of the projected revenue collection. The projection of state revenue includes receipts from Integrated GST settlement on account of SGST, and it’s based on the revenue subsumed in GST in the base year of 2015-16. It also incorporates a 14% annual growth rate in the revenue under protection during the GST transition period. The GST compensation is paid using funds collected specifically as compensation cess, which is levied on products deemed luxury or sin goods.
The NIPFP Findings
The NIPFP’s research suggests that the revenue gap in state GST collection could fluctuate between Rs. 2.85 lakh crore to Rs. 3.27 lakh crore. Additionally, the GST compensation cess collection for 2020-21 might range from Rs. 82,242 crore to Rs. 90,386 crore. Therefore, revenue in the realm of Rs. 1.95 lakh to Rs. 2.45 lakh crore may be necessary for providing full GST compensation to states in 2020-21. The maximum revenue gaps are projected for Goa, Punjab, Chhattisgarh, Kerala, and Chhattisgarh.
Government Intervention
The Ministry of Finance recently released the eighth weekly instalment of Rs. 6,000 crore to meet the GST compensation shortfall. This raises the total amount released to Rs. 48,000 crore. The Central government borrows these funds under a special window and provides them to states in a back-to-back loan arrangement. The interest rate for the latest loan instalment is 4.19%, with the average rate on borrowing to date sitting at 4.7%.
About the National Institute for Public Finance and Policy
NIPFP is an autonomous body jointly established by the Ministry of Finance, the erstwhile Planning Commission, and several state governments in 1976. It carries out research, policy advocacy, and capacity building in areas related to public economics. One of its major roles is to assist different levels of government in formulating and reforming public policies by providing an analytical base. Funded by annual grants from the Ministry of Finance and various State governments, it functions independently.
Governing Body and Location
The NIPFP’s governing body includes members from the Ministry of Finance, NITI Aayog, Reserve Bank of India and three state governments among others. Currently, Dr. Urjit Patel, former Governor of the RBI, presides as the Chairman. The NIPFP is located in New Delhi.
