‘Centre not obliged to pay for GST shortfall’
States may have to borrow from market to meet shortfall in revenue
New Delhi, July 30: The attorney-general has opined that the Centre has no statutory obligation to make up from its coffers any shortfall in GST revenues of states, which may now have to look at market borrowings against future revenue mop-up, sources said.
The Centre had in March sought views from attorney-general K.K. Venugopal on the legality of market borrowing to make good the shortfall in compensation fund — a corpus created from levy of additional tax on luxury and sin goods to compensate states for revenue shortfall arising from their taxes being subsumed into the Goods and Services Tax (GST).
Sources said the AG in his view has said there is no obligation on the central government to pay the GST compensation shortfall from its coffers.
The AG has also said the GST Council has to decide on making good the shortfall in the GST compensation fund by providing the sufficient amount to be credited to it.
Sources said the options before the Council for meeting the shortfall could be to rationalise GST rates, cover more items under the compensation cess or increase the cess, or recommend higher borrowing by states to be repaid by the future collections into the compensation fund.
Since raising tax or cess rates might not be feasible in the current pandemic situation, the option that remains would be each state borrowing from the market against the consolidated fund of the state to meet the shortfall in revenue.
Under GST law, states were guaranteed to be compensated bi-monthly for any loss of revenue in the first five years of the GST implementation from July 1, 2017. The shortfall is calculated assuming a 14 per cent annual growth in GST collections by states over the base year of 2015-16. Under the GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs. On top of the highest tax slab, a cess is levied on luxury, sin and demerit goods and the proceeds from the same are used to compensate states for any revenue loss.
During the eighth meeting of the Council held in January 2017, the then finance minister of Karnataka had said “the understanding should be that if the amount for compensation was inadequate in the GST compensation fund, then cess could be collected in the sixth year or subsequent year to adjust the payment.”
SOURCES SAID the options before the Council for meeting the shortfall could be to rationalise GST rates, cover more items under the compensation cess or increase the cess, or recommend higher borrowing by states