GST shortfall: Rift wide open, ten states unrelenting : 06-10-2020

An eight-hour-long meeting of the Goods and Service Tax Council on Monday could not break the impasse over how to make good the states’ GST revenue shortfall in FY21, with 10 states steadfastly dissenting and refusing to accept the Centre’s formula.

The Centre wants the states to borrow as much as Rs 1.1 lakh crore from the market under a special low-cost RBI window, sans any cost to them.

The Council decided to continue discussion on the issue at its 43rd meeting on October 12.

As many as 21 states have acceded to the Centre’s plea to accept the aforementioned borrowing Option 1, which is also incentivised with fiscal forbearance, under the Finance Commission.

The Council, however, decided to extend the applicability of ‘compensation cess’ on specified ‘luxury and demerit foods like cars, tobacco items and aerated drinks beyond the current date of June 2022, for such period as may be required to meet the revenue gap.

This is to service the planned debt and also raise the supplement funds required for bridging the states’ yawning revenue shortfall.

Briefing the media after a prolonged session of the Council, finance minister Nirmala Sitharaman said that, “nobody is going to be denied the compensation”, including for (the shortfall caused by) GST implementation and Covid-19.

But the dissenting states’ concern is that under the two options mooted by the Centre, the states will get compensated this year only for the shortfall on account of GST implementation. As far as revenue shortfall dues to Covid-19 is concerned, they will not only have to wait till extra cess proceeds (post-June 2022) start flowing in, but also settle for a gradual appropriation of the compensation funds even thereafter. It is incumbent on the Centre to borrow as compensation is a legal obligation on the Centre, they contend. They stress that the compensation for any shortfall from protected revenue growth of 14% is meant to be an ‘income’ for them, sans any cost.

It seems the Centre, which earlier disincentivised its own second borrowing option (it involved attendant cost to states as the pandemic-induced part of the borrowing was to be added as debt on the states’ capital account), has relented further. It is now saying both options won’t involve any interest cost to the states, but the dissenting states feel the delay in getting full compensation is tantamount to a cost.

The Centre had earlier indicated to the dissident states that if they don’t fall in line before Monday meeting of the Council, then they would have to wait till June 2022 to get their compensation dues.

Meanwhile, the Council decided that cess collection this year so far amounting to Rs 20,000 crore would be disbursed to them forthwith, considering the acute fiscal problems they are facing.

Further, it was also decided to disburse `25,000 crore to those states that hadn’t received their due shares in the first year of GST implementation, due to lack of clear-cut formula for integrated GST (I-GST) distribution. However, some states that had been paid more than their dues would be required to return the amount in due course, Sitharaman said. The I-GST disbursal in 2017-18 was on an ad-hoc basis.

During the council’s meeting, Bihar deputy chief minister along with several other states’ representatives called for allowing willing states to go ahead with borrowing as they were facing urgent funds requirement.

Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, West Bengal and Chhatisgarh are the states not on board with the Centre’s proposal.

The original Option 1 amount Rs 97,000 crore was revised to Rs 1.1 lakh crore, as the GST revenue growth this year has been revised downwards. It is to be noted that gross GST revenue in FY20 had grown just 3.8%.

Among other decisions to ease compliance, the Council allowed taxpayers with less than Rs 5 crore turnover to file the summary return GSTR-3B on a quarterly basis, instated of every month. Of course, monthly tax payment through a challan will be required. “Such quarterly taxpayers would, for the first two months of the quarter, have an option to pay 35% of the net cash tax liability of the last quarter using an auto generated challan,” finance secretary Ajay Bhushan Pandey said after the 42nd Council meeting.

It may be recalled that the Centre, in view of the Covid-19 pandemic, had in May allowed additional borrowing limit of up to Rs 4.28 lakh crore (2% of GSDP) to states for FY21. While 0.5 pecentage point (pp) of the extra borrowing window (Rs 1.07 lakh crore) is available to all states unconditionally, one pps was to be made available in four equal tranches with each to “clearly specified, measurable and feasible reform actions”. The balance 0.5 pp was to be accessed by states, subject to their ‘completely achieving’ the milestones in at least three out of four reform areas. Later, an offer was made by the Centre at the GST Council, whereby the Option 1 came with the incentive of (additional) 0.5 pp unconditional FRBM relaxation for states.

Source : PTI