The sharp decline in Goods and Services Tax (GST) collections could not only add to the Centre’s fiscal woes, but also deprive state governments of their assured compensation for revenue shortfall. If the collections till September are to be gone by, the compensation cess kitty will fall short by Rs 1,08,000 crore over FY20 (about Rs9,000 crore/month), denting the states’ coffers. A more realistic estimate of the shortfall, of course, could be almost half of this amount, because towards the end of a fiscal, a big chunk of floating integrated GST gets distributed and this could add roughly Rs50,000-60,000 crore to the state GST (S-GST) kitty. At the end of September, over Rs1 lakh crore of IGST remained unallocated.
A senior official on condition of anonymity told FE the likley cess receipts this year might be enough for bridging the states’ GST revenue shortfall only till December. The gap has widened to roughly Rs10,000 crore per/month since July, he added. What could be more worrisome for the states is that the Centre is under no legal obligation to make up for the shortfall by dipping into the Consolidated Fund of India if the proceeds from various cesses meant for bridging the states’ GST revenue deficit turn out to be insufficient.
The states are constitutionally guaranteed of a 14% y-o-y growth in GST revenue over the FY16 base, which means that the combined average monthly GST revenue of all states must be Rs55,900 crore this fiscal. As against this, as the chart shows, the state GST (S-GST) revenue in the first half of this fiscal was just Rs38,700 crore. While the requirement of compensation has increased, so has the cess kitty. The cess applies on transactions where GST is already levied, including those of pan masala, tobacco and tobacco products, aerated waters, motor cars and certain large motor passenger vehicles and coal.
The overall GST revenue has grown 6% y-o-y in FY19 and the growth rate has halved in the current fiscal. “Legally, its not clear where the money would come from to compensate states for the shortfall if the designated fund is not sufficient. The GST Council will have to discuss and formulate a solution in the coming months,” Sushil Modi, deputy chief minister and finance minister of Bihar said. However, a central government official said that any solution that requires dipping into consolidated fund of India will not be acceptable. Another official said that one possible solution could be to impose cess on items that aren’t currently taxed at 28%. He added that while cess is collected from items in the highest tax slab, the law doesn’t prohibit levying the same on other items.
In the 37th GST Council meet in Goa last month, the 15th Finance Commission in its presentation had raised the issue that protected revenue growth for states was unusually high, given the economic slowdown and subdued actual tax receipts. The commission had also suggested that states could agree to a lower assured growth in lieu of an extended period for compensation. It also pointed out that a lower central revenue eventually means a lower devolution to states. Sources, however, said that while states batted for a 3-year extension to compensation period to 2025, they rejected the suggestion of a lower guaranteed growth. As per rules, any surplus in the cess kitty gets disbursed among the Centre and states on a 50:50 basis. Last two years saw surplus in the kitty.