The recent 41st Goods and Services Tax (GST) council meeting was convened to deliberate on the issue of compensating states for the loss of revenue due to the onset of GST and plummeting cess collections. This meeting proves significant due to the substantial monetary implications surrounding the issue.
About The GST Council
The GST Council, an institution constituted under Article 279A, is responsible for drafting recommendations to both the Union and State governments on issues pertaining to the Goods and Services Tax. It’s chaired by the Union Finance Minister along with the Union State Minister of Revenue or Finance and ministers in charge of Finance or Taxation from all states as its members. Deemed a federal body, it ensures equal representation from both the centre and the states.
Key Points: The Shortfall in GST and Cess Collection
The economic slowdown in FY 2019-20 has resulted in a reduced GST and cess collection, culminating in a 40% gap in the compensation paid compared to the cess collected. In concrete terms, the central government had to pay over Rs.1.65 lakh crore as GST compensation in 2019-20 by utilizing excess cess amounts collected during 2017-18 and 2018-19. Projected figures for 2020-21 show an anticipated state GST revenue gap of around Rs. 3 lakh crore, with cess collections projected at only Rs. 65,000 crore, leaving a significant shortfall of Rs. 2.35 lakh crore.
Breaking Down the Shortfall
Two factors contribute to the estimated Rs. 2.35 lakh crore shortfall. Rs. 97,000 crore results directly from the implementation of GST, while the remaining imbalance can be attributed to the effects of Covid-19. This distinction implies different causes: the implementation of GST and the economic repercussions of Covid-19 – referred to as an “act of God” by the Finance Minister. Despite being unanticipated in the GST Compensation Act, 2017, the government guaranteed states compensation for any loss of revenue throughout the first five years of GST implementation, until 2022, through a cess applied on sin and luxury goods.
Centre’s Proposals
To mitigate the shortfall, the Centre proposed two borrowing options for the states. The first option offered is a special window that would allow states to borrow Rs. 97,000 crore at a reasonable interest rate, repayable from the cess collection after five years of GST implementation ending in 2022. Alternatively, states could opt to cover the entire Rs. 2.35 lakh crore gap via borrowing in consultation with the Reserve Bank of India (RBI). The Centre has given states seven days to decide between the two options. Additionally, states choosing the first option would receive a 0.5% relaxation in their borrowing limits under the Fiscal Responsibility and Budget Management Act, 2003. However, the borrowing plan is valid only for FY 2020-21, with the GST Council set to review the revenue situation next fiscal to decide on payments for 2021-22.
Looking Forward
To overcome this shortfall, the GST council may consider increasing the cess or extending its portfolio to include more products under the compensation levy. It could also extend the compensation period beyond the initial five years.