Three years since the grand launch of the GST regime in 2017, the government has for the first time admitted that it has no money to pay the state governments their share of GST revenues as was prescribed by the GST law.
New Delhi, July 30:
Three years since the grand launch of the GST regime in 2017, the government has for the first time admitted that it has no money to pay the state governments their share of GST revenues as was prescribed by the GST law.
Since August 2019, much before the lockdown, the economic situation has been such that GST collection is almost half of what is due to the states. Solutions include either raising taxes on some items or bringing exempted items under the tax net.
Union Finance Secretary Ajay Bhushan Pandey apparently told the Parliamentary panel on finance ministry that “the central government is in no position to pay the share of the states” under the revenue share formula laid down in the GST Act. Now the Opposition members of the Parliamentary panel are up in arms over the statement made by Pandey.
Members from Congress and other parties who attended the first meeting of the standing committee on finance led by BJP’s Jayant Sinha said that Pandey made the comments in front of the committee.
OPPOSITION ALARMED AT SHORTFALL
The first meeting of the committee pending for long due to the coronavirus crisis found Opposition members raising problems faced by the states due to non-release of states’ share over the past few months.
The members flagged that the GST law mandates that Centre must compensate the states for any shortfall in reaching a 14% revenue growth target, which is calculated on FY16 revenue base from taxes subsumed in GST. They claimed that states which are incurring huge expenses to battle coronavirus and also assist migrants, those who lost jobs, have been facing a severe resource crunch.
Angry members of the Opposition challenged the finance secretary’s statement by asking “how the government could renege on the commitment to the States.”
A member of the panel told India Today TV, “The central government is in a rush to push the implementation of GST law. The resource crunch is highlighting that the law was hastily drawn and shoddily implemented. The deficiencies are being exposed by the economic crisis triggered by the pandemic and the Centre is as always clueless on how to resolve the situation.”
FINANCE MINISTRY’S STAND
Sources said that the finance secretary, however, has said that the GST Act was built with provisions to rework the formula for paying compensation to the state governments if the revenue collection drops below a certain level. He said that the issue is under discussion in the GST Council.
Amidst clamour for compensation and dues among the states, a finance ministry release on Monday said that the central government has released Rs 13,806 crore of GST compensation pertaining to the FY 2019-20.
The GST Council, which is the sole decision-making body for the ‘One Tax’ regime, was scheduled to hold a meeting in July to discuss an alternative formula of compensation for cash-strapped states. But the meeting is yet to be called.
HOW BAD IS THE REVENUE POSITION
In a recent press release, the government announced the release of Rs 13,806 crore of GST compensation to states for March 2020. It stated that once this amount is taken into account, the entire compensation upto 2019-20 has been released to states.
The total amount of compensation released for the year 2019-20 is Rs 1,65,302 crore whereas the amount of cess collected in the year 2019-20 was Rs 95,444 crore.
The Centre also said that to release the compensation for 2019-20, the balance cess amount collected during 2017-18 and 2018-19 was also utilised. In addition, Centre had transferred Rs 33,412 crore from Consolidated Fund of India to the Compensation Fund as a part of an exercise to apportion balance of IGST pertaining to 2017-18.
According to a background note prepared by the government in the current fiscal year 2020-21, the central government has released Rs 15,340 crore to the states and UTs as GST compensation despite an almost insignificant collection practically due to relief provided in terms of filing of return and payment of taxes owing to lockdown caused by the outbreak of Covid-19 pandemic.
In comparison, government sources say, earlier in the previous FY 2019-20, the central government had released Rs 1,20,498 crore GST compensation to states and UTs while it had collected only about Rs 95,000 crore in the form of compensation cess.
In FY 2017-18, a total GST compensation cess of Rs 62,611 crore was collected, out of which a sum of Rs 41,146 crore was released to the states/UTs as GST compensation.
After that in the FY 2018-19, Rs 95,081 crore was collected as GST compensation cess out of which Rs 69,275 crore were released to the states and UTs as GST compensation.
The government had elbow room as on March 31, 2019 with an amount of Rs 47,271 crore of GST compensation cess collected that had remained unutilized after the release of GST compensation to the states and UTs in the FYs 2017-18 and 2018-19.
In the background note, the government admitted that much before the coronavirus-triggered economic slowdown, “since the end of August 2019, the central government started realising the impending precarious position in paying GST compensation to the states and UTs as the compensation cess requirement was being double of the average monthly cess collection”.
The note says that on an average the monthly GST compensation cess requirement was to the tune of Rs 14,000 crore while the cess collection average was only in the range of Rs 7,000 to Rs 8,000 crore per month.
According to finance ministry sources, the monthly cess requirements were to increase over the years as given in the table.
Base Year Figures for 2015-16: Rs 3,97,335 crore
*Estimates assuming a growth of 5% (Comparable to growth this year)
The GST Council, which is discussing the way out, has little option but to
- A) Bring more items under the cess base by expanding the base of GST cess items
- B) To increase cess rate on the existing items. This means raising the tax rate on items by rationalisation of rates by shuffling slab rates
The move B has its own limitations. An increase in compensation cess on few items could only yield about Rs 2000-3000 crore a year.
- C) Forego full cess compensation which was increasing at 14% per annum
- D) To go ahead with whatever compensation is available
POINT OF STRIFE BETWEEN CENTRE & STATES
Government sources have said that compensation till the bimonthly period of Oct-Nov, 2019 has been paid for all states and no state has been paid compensation for any period beyond that without any discrimination between states.
Sources claimed that calculation of compensation is done in a completely transparent manner and is shared with the states.
The central government further rues that despite its attempt to keep the exercise transparent on non-discriminatory payment of GST compensation cess has become an arguable point of discussion among the Centre and states.
GST law lays down that compensation for loss of revenue to states due to introduction of GST has to be paid by taking into account the gap between the protected revenue and the GST revenue actually collected.
PAYMENT FROM THE FUND
The protected revenue is calculated at 14% growth per annum on the base year figure of 2015-16 of the taxes subsumed in GST. The compensation is paid for every bimonthly period for the transition period of five years but GST law clearly states that all compensation to states shall be paid from the Fund.
In the GST Council, the issue of the cess falling short of compensation requirement has come up for discussion several times.
In the seventh meeting of the GST Council held in December 2016, late Finance Minister and then Chairman of GST Council, Arun Jaitley, had noted that “the demand for payment of compensation from the Consolidated Fund of India essentially meant funding compensation from income tax or non-tax revenues of the central government, which would be a challenge as the central government also had its own committed expenditure.”
Jaitley had said that “…based on these considerations, certain principles had been agreed upon, namely that the compensation would be funded out of the cess mechanism, which would have a pool of revenue and if there was any shortfall in this pool, it could be supplemented by some mechanism that the Council might decide”.
Suggesting a way out, Jaitley had proposed that “cess should not become a cross around the Council’s neck.
When finance secretary Pandey informed the parliamentary panel that there were alternative solutions built in the GST system to make up for low GST collection, he was referring to Jaitley’s statement in the 8th meeting of the council that “there was constitutional commitment for the central government to provide 100 percent compensation and the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years”.
