For the first time since March 2020 when the Covid-19 pandemic hit India, the GST Council meeting on Friday in Lucknow will have all the members present physically. Finance Minister Nirmala Sitharaman will chair the meet attended by representatives of 28 states and three Union Territories with assemblies to discuss agenda items that may both reduce and increase the burden on consumers
The GST Act that came into effect from July 1, 2017, provided assurance to states that if the growth in revenue post GST was less than 14 per cent, they will get compensated for the shortfall for a period of five years through special cess on a certain category of goods such as automobiles and tobacco products.
Facing a shortfall, states are clamouring for extending the compensation regime beyond June 2022 deadline. Their argument is that the pandemic has caused a major setback in revenue and their burden has gone up.
Since April 2021, the GST revenue had started diminishing and the trend continued during the entire last fiscal and early part of this fiscal. It is only during the last few months the collections have stayed beyond the 1 lakh crore mark.
To tide over the shortfall, the GST Council approved a mechanism that included special borrowing by the Centre for the states and compensation cess was to be used for Interest and repayment of the principal amount.
Under the special borrowing scheme approved by the RBI for FY 2020-21, the total borrowing for states was around 1.10 lakh crore. In FY2021-22, 75,000 crore has already been borrowed and it’s estimated that the borrowing for the states during the fiscal would exceed 1.5 lakh crore.
The GST Council to reduce the stress on states has already said yes to the existence of compensation cess beyond the June 2022 deadline so that the states can repay the almost 2.6 lakh crore principal amount of borrowing along with the interest by the states.
But states want more. The states are saying beyond the assistance of cess for paying back the borrowing they want the compensation for the shortfall in revenue due to GST being in play to continue beyond June 2022 when the mandatory five-year deadline ends.
It is expected that the Centre will talk about more revenue enhancement measures through increasing compliance and rationalisation of duties.
The centre is hesitant to agree to a blanket extension of the June 2022 deadline for compensation for revenue shortfall and a 14 per cent hike by states. So, during the Friday meeting of the council the Centre, facing the push from the states, is expected to meet demands for states getting compensation for revenue shortfall with proposals to ramp up the revenue generation through duty rationalisation and administrative measures.
Sources in the government said that the Centre may link compensation to the performance of states on tax collection and compliance criteria.
This is based on a detailed rating of states which shows that while some have been lethargic. the 15th Finance Commission had noted in its report flagged that “an assurance of 14 per cent growth rate for five years, by treating all the states on par in terms of GST revenue growth, irrespective of their wide-ranging revenue growth experienced in the past has created another significant complication in federal finance.”
There is empirical evidence that while states, such as Himachal Pradesh, Uttarakhand, J&K and those in the Northeast need a helping hand as Central Sales Tax was a key source of revenue.
The average growth of GST collection in 2018-19 and 2019-20 was highest in Bihar, Assam, Jharkhand, Odisha, and Madhya Pradesh. It was the lowest in Maharashtra, Gujarat, Tamil Nadu, Kerala, and Delhi. This means while the poor States recorded the highest growth, the richer States had lower growth. These low performers were found to have reduced the GST enforcement setup which is the key element for tax compliance.
However, there are indications that compensation cess and compensation mechanism in some form are likely to continue for a period beyond the five years mandated by the law and that’s the bad news the Lucknow meet may send to the consumers.