GST com­pen­sa­tion: States may push for f ive -year ex­ten­sion

Set to seek higher bor­row­ing lim­its as rev­enues dry up


States are likely to re­quest the Cen­tre for an ex­ten­sion in the goods and ser­vices tax (GST) com­pen­sa­tion pe­riod, by up to five years be­yond FY22. This is driven by the se­vere short­fall in rev­enue ow­ing to dis­rup­tion in eco­nomic ac­tiv­ity.

The GST Coun­cil is ex­pected to meet this month to dis­cuss al­ter­na­tive com­pen­sa­tion mech­a­nisms, amid in­ad­e­quate cess col­lec­tions. States may write to the 15th Fi­nance Com­mis­sion, seek­ing the ex­ten­sion. They are likely to point out the chal­lenge in meet­ing rou­tine ex­pen­di­ture af­ter 2022, in the ab­sence of any com­pen­sa­tion.

States may dis­cour­age the Cen­tre from re­duc­ing the out­lay on Cen­trally Spon­sored Schemes (CSS) and rev­enue deficit grants, even if it war­rants bor­row­ing from the markets.

In ad­di­tion, they may re­quest for an in­crease in the un­con­di­tional bor­row­ing limit. At present, a state can go for such bor­row­ings till its fis­cal deficit hits 3.5 per cent of the gross state do­mes­tic prod­uct (GSDP). States want the thresh­old to be raised to 4.5 per cent.

How­ever, states are di­vided when it comes to mar­ket bor­row­ings.

“We will write to the fi­nance com­mis­sion seek­ing ex­ten­sion of the com­pen­sa­tion pe­riod by five years. There is no scope to hike rates this year as we can’t bur­den the com­mon man,” said Sushil Ku­mar Modi, deputy chief min­is­ter of Bihar.

“Since states will not bur­den the Cen­tre’s ex­che­quer with com­pen­sa­tion in case of in­ad­e­quate col­lec­tion, the fi­nance com­mis­sion should consider ex­tend­ing the com­pen­sa­tion pe­riod. By the time we are able to hike tax rates, the com­pen­sa­tion pe­riod will be over,” he added.

Fur­ther, he said that the Cen­tre should not cut down on cen­trally spon­sored schemes and rev­enue deficit grants.

“We are not get­ting com­pen­sa­tion, so the Cen­tre should not fur­ther bur­den states by cut­ting CSS and rev­enue deficit grants,” said Modi.

Pun­jab will also press for ex­ten­sion be­yond 2022. “If I can­not meet my ex­penses, what do I do? We need the high­est com­pen­sa­tion, given that a fourth of our rev­enues are based on food grains that got sub­sumed un­der GST. We went ahead with GST be­cause it was in na­tional in­ter­est,” said Pun­jab FM Man­preet Singh Badal.

West Ben­gal and Ker­ala will fol­low suit. The for­mer is of view that the Coun­cil does not have any eq­uity/se­cu­rity to of­fer for bor­row­ing from the markets, hence the com­pen­sa­tion peri

od should be ex­tended.

“The GST Coun­cil doesn’t have a lo­cus standi, how can it bor­row? It doesn’t have eq­uity and no se­cu­rity to of­fer,” said West Ben­gal FM Amit Mi­tra. His Ker­ala coun­ter­part Thomas Isaac also favours an ex­ten­sion.

Ra­jat Bose, part­ner at Shardul Amarc­hand Man­gal­das and Co, said the gov­ern­ment has lim­ited op­tions to raise funds for com­pen­sat­ing states. Th­ese are rais­ing cess, bring­ing more items within the am­bit of cess, or bor­row­ing more.

“The first two op­tions seem a dis­tant re­al­ity given the present sit­u­a­tion. If the gov­ern­ment re­sorts to the third op­tion, then one way to off­set the bor­row­ing will be to ex­tend the cess for at least a cou­ple of years be­yond 2022,” Bose added.

If the com­pen­sa­tion cess is ex­tended be­yond 2022, then cars, cig­a­rettes, and aer­ated drinks will con­tinue to be bur­dened with the cess be­yond 28 per cent.

States had ear­lier ap­proached the fi­nance com­mis­sion to ex­tend the com­pen­sa­tion cess, but only by two years. The com­mis­sion, on the other hand, had ad­vised low­er­ing the rate of rev­enue growth from 14 per cent to consider tax losses, which states re­jected.

They were as­sured full com­pen­sa­tion for their rev­enue losses for the first five year of the GST regime. The losses here re­fer to states miss­ing out on 14 per cent growth in tax rev­enues, on the base year of 2015-16.

A re­port by the com­mis­sion also stated that states would

need com­pen­sa­tion un­der GST even af­ter 2022.

Sub­se­quently, states will ask the Cen­tre to in­crease the un­con­di­tional bor­row­ing limit, un­der the Fis­cal Re­spon­si­bil­ity and Bud­get Man­age­ment (FRBM) Act, to 4 per cent of GSDP, ver­sus 3.5 per cent now.

Un­der its At­manirb­har Bharat pack­age, the Cen­tre in­creased states’ fis­cal deficit limit to 5 per cent from 3 per cent, but only up to 3.5 per cent was un­con­di­tional. Be­yond that, there were rid­ers such as the state’s per­for­mance in im­ple­ment­ing ‘one na­tion one ra­tion card’, en­sur­ing ease of do­ing busi­ness, car­ry­ing out power re­forms, and boost­ing ur­ban lo­cal bod­ies’ rev­enues.

The Bud­get has pro­jected al­lo­ca­tion to CSS to rise to ~3.4 tril­lion in FY21, from ~3.2 tril­lion in FY20 (re­vised es­ti­mates). Var­i­ous grants rec­om­mended by the fi­nance com­mis­sion, in­clud­ing the rev­enue deficit grant, are pegged at ~1.5 tril­lion, against ~1.2 tril­lion over this pe­riod.

As against ~95,000 crore in com­pen­sa­tion dur­ing FY20, the Cen­tre dis­bursed ~1.15 tril­lion to states up to Novem­ber us­ing the bal­ance from pre­vi­ous years, and ~36,400 crore for the three months up to Fe­bru­ary from pend­ing IGST dues from FY18.

Although cess col­lec­tion im­proved sig­nif­i­cantly to ~7,665 crore in June from ~6,020 crore in May and ~990 crore in April, col­lec­tion for Q1 was down 40 per cent year-on-year.

The Cen­tre and states have man­aged to mop up just ~1.85 tril­lion from GST in Q1FY21, which was 41 per cent lower than the mop-up in the cor­re­spond­ing pe­riod last year.

The GST Coun­cil is ex­pected to meet this month to dis­cuss al­ter­na­tive com­pen­sa­tion mech­a­nisms amid in­ad­e­quate cess col­lec­tions

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