States and union territories (UTs) may require a whopping Rs 3.12 lakh crore Goods and Services Tax (GST) compensation in the current financial year, an 89% jump over 2019-20 because of a sharp fall in the tax revenue, as the economy has been severely hit by the coronavirus disease (Covid-19) pandemic and the resultant 68-day nationwide lockdown restrictions, two people aware of the matter said ahead of crucial GST Council’s meeting that will dwell on this key issue on Thursday.
The GST law assures states a 14% increase in their annual revenue for five years from July 1 and also guarantee them that their revenue shortfall, if any, would be made good through the compensation cess levied on luxury goods and sin products such as liqour, cigarettes, aerated water, automobiles, coal and tobacco products.
According to an estimate, GST compensation cess requirement for the financial year 2020-21 is pegged around Rs. 26,000 crore per month because of the unprecedented Covid-19 situation. An average monthly compensation cess of about Rs 13,775 crore was paid to states and UTs in 2019-20, even though the average monthly collection was only Rs 7,953.6 crore a month, they said requesting anonymity.
Though the impact of nationwide lockdown restrictions on business activities was confined to a few days of the previous financial year that ended on March 31, the compensation cess collection was substantially lower than the actual payout. Nationwide lockdown restrictions were enforced from March 25 in a bid to contain the spread of the contagion.
According to an official statement released on July 27, the total amount of compensation paid to states and UTs in 2019-20 was Rs 1,65,302 crore, while the total amount of cess collected in that year was Rs 95,444 crore. The lower revenue collection was primarily due to subdued economic growth.
India’s gross domestic product (GDP) had slowed to 4.2% in fiscal 2019-20, which is the lowest in 11 years.
States and UTs were fully compensated in 2019-20, as there was some surplus in the compensation fund from previous years. Besides, some cess collected in the current financial year was also used, the persons mentioned above said.
The last tranche of compensation worth Rs 13,806 crore for the previous financial year was paid in the third week of July, according to the July 27 statement.
A note circulated in the 40th GST Council meeting, held on June 12, said the compensation cess collected in 2017-18 was Rs 62,612 crore that rose to Rs 95,081 crore in 2018-19 and increased to Rs 95,444 crore in 2019-20. However, the compensation paid in 2017-18 was less than the total collection at Rs 41,146 crore, and Rs 69,275 crore (2018-19).
So far, the government has paid compensation cess for three fiscal years since the roll-out of the GST regime in July 2017, but this year the gap between cess collection and compensation requirement has widened and needs to be resolved by the GST Council, one person said.
“The loss of revenue is for both the Centre and states. In that context, the critical situation should not be viewed as only the problem of the states. The Centre is also equally facing an extraordinary fiscal crisis. This is not only because of a massive dip in GST collection but also of income tax, customs, excise, etc. It’s a collective problem and must not be viewed as the Centre vs. states problem,” the person said.
The Covid-19 outbreak and the resultant slowdown impact causing loss of revenue is not arising on account of implementation of GST, the second person said. “It’s a force majeure situation and the Centre and states have to collectively resolve it, according to the true spirit of the GST Act under the federal framework. It is not the Centre’s responsibility alone. The GST Council will have to put its collective decision-making mechanism at work to resolve this critical issue,” the person added.
The person cited the Attorney-General (A-G) of India KK Venugopal’s opinion that there was no obligation on the Centre under the GST laws to compensate for the loss of revenue on account of natural disaster, Covid-19, or economic slowdown, as they are not related to the implementation of GST. “The GST council has to decide how to meet the shortfall in such circumstances and not the Central government,” the person said.
“Even the then Union Finance Minister [Arun Jaitley] categorically stated that compensation to the states due to shortfall of GST implementation cannot be paid from the Consolidated Fund of India. However, if required, market borrowing could be an option to compensate and later the same can be repaid through the future collection of cess,” the person said.
However, some states say that as per the letter and spirit of the GST regime the Centre is committed to pay the compensation.
In a letter to Union Finance Minister Nirmala Sitharaman on Wednesday, West Bengal finance minister Amit Mitra said, “It is surprising that that the constitutional guarantee given to the states is being interpreted in a manner that the Centre is not responsible to compensate the states and it is the states (in the GST Council), which will have to find means to compensate themselves!
“Nothing can be more damaging, unfair and unjust than this. Those who are forwarding such views are either not aware of the spirit and intent of the Constitutional Amendment, or are consciously turning a blind eye to renege the sovereign promise to the states,” he said in the letter reviewed by HT.
Mitra said there can be no going back on the fact that compensation has to be paid. The rate of 14% is sacrosanct, as it was unanimously decided by the GST Council.
“Under no circumstance, states should be asked to borrow from the market, as it will increase their debt servicing liability. It may also lead to cut state expenditure which is not desirable at this juncture, when the economy is witnessing severe recessionary trend,” he said.
Reminding her promise to pay compensation to states at the 39th meeting of the GST Council, Mitra said the tax regime is hailed world over as an example of cooperative federalism, which is based on mutual trust. “Some dent in this trust has already occurred due to delayed payment of GST compensation. Let us not do anything that will give a death blow to this unique collective effort,” the letter further stated.
