Towards the end of July, the Centre paid the last tranche of Goods and Services Tax (GST) compensation to the states. With this the total GST compensation paid to the states for 2019-20 rose to Rs 1.65 lakh crore. But the states want more, and hope that today’s GST Council meeting will favour them.
Hit hard by coronavirus pandemic-induced lockdowns, the states collectively need over Rs 3 lakh crore, according to estimates, in the ongoing financial year. They have been writing to the Centre seeking more GST compensation or permission to borrow as per they own suitability. And, there lies the trouble.
With its July release of the GST compensation to the states, the Centre exceeded its GST compensation cess collection by about Rs 70,000 crore. Its GST compensation cess collection for 2019-20 stood at Rs 95,444 crore.
The Centre could pay “extra” GST compensation as it had saved from the GST compensation cess collected in the previous two years. Earlier it had to pay less to the states as GST compensation than what was collected from the cess.
In 2017-18 — the first year of GST in operation, the compensation cess collection stood at Rs 62,612 crore but the Centre paid only Rs 41,146 crore to the states.
The next year, the compensation cess collection rose to Rs 95,081 crore but the Centre paid Rs 69,275 crore as GST compensation to the states in 2018-19.
Now, when the states want more money as GST compensation, the Centre says its purse is empty. The Goods and Services Tax (GST) Council is expected to find a solution in its meeting today.
WHY COMPENSATION
GST became the new indirect tax in 2017 subsuming 17 existing taxes. But unlike the replaced tax regime, the GST is a destination tax. This means the state where a product or service is sold collects the tax. The big manufacturing states were to lose revenue because previously they collected tax when they “exported” products to other states.
To bring them onboard, the GST law provided for compensation to such states for five years. It was assumed that the revenue collection would increase at a constant rate of 14 per cent a year for all states.
So, if any state failed to meet the 14 per cent hike in its revenue in a year, the Centre would compensate by paying for the shortfall. To pay the compensation, a separate GST compensation cess was brought in.
WHAT IS THE PROBLEM NOW?
The Centre cannot promise to pay from its non-cess revenue, as it is constitutionally bound to share 42 per cent of the total revenue it collects. That is the reason why the Centre has recently said it is not in a position to pay the compensation as it does not have money.
In any case, the Centre’s GST compensation cess collection has been dwindling since August 2019. It has been almost a year that the Centre has seen its earnings meant to compensate the states decline while the states need higher cash transfers. The states, on the other hand, were already in trouble before the coronavirus pandemic threw economic gears out of order.
Reports earlier said the Centre sought Attorney General KK Venugopal’s opinion on the legal compulsion to pay the GST compensation cess to the states. The attorney general is reported to have told the Centre that it is not legally bound to compensate the states for the GST shortfall.
This has drawn sharp criticism from the Opposition parties and many state governments. Congress president Sonia Gandhi called it a betrayal of the promise made by the government at the time of the GST rollout.
Bihar Deputy Chief Minister and BJP leader Sushil Modi said the Centre is “morally” bound to pay GST compensation to the states, which have been reeling under a tremendous cash crunch.
The state governments don’t want to rework their GST slab as any increase in taxes would make them unpopular in their respective states — all of which are facing serious economic crises due to the coronavirus pandemic-induced shutdowns.
THE CLASH
The Centre wants the states to borrow but without exceeding the limit of five per cent of their GDP, while paying back with interest on the basis of future revenue collection.
The states are reluctant as it would make their balance sheet vulnerable. They want the GST Council to borrow the money and pass it on to them so that they are not directly responsible for defaults that are likely to happen.
Though the Centre’s khata-book generally is taken as the benchmark for judging the health of Indian economy, the states play a bigger role on the ground. The states spend more than the Centre.
Collectively, the states account for about 60 per cent of total government spending in India. This is what makes them the most important cog in the wheel of the Indian economy. And, as a recent SBI research paper suggested, the states need an unconditional and immediate financial assistance to salvage the Indian economy from further collapse.