The Centre must deliver on its promise to compensate the states for five years from 2017-18 for any shortfall in goods and services tax (GST) collections in relation to the past trend. There can be no ifs and buts and act of God appeals on the subject. Such compensation is essential, not only to prevent the federal fabric from fraying but also to enable the states to pull their weight in the fiscal stimulus the economy needs in the face of an unprecedented blow.
The Centre’s undertaking to give that compensation is unconditional. If the cesses that were identified as sources for mobilising the funds needed for compensation of shortfall themselves fall short of what is required, too bad. The Centre should make additional borrowings to fulfil its promise and fiscally empower the states. The GST compensation Act 2017 guarantees a 14% annual growth in tax revenues for the states from the amount collected by them in 2015-16 for five years till 2022.
This promise has to be kept. While the Act identified some cesses to finance such compensation, nowhere does the Act say that such compensation would be made only from the proceeds of that cess. Nor is such an interpretation in the spirit of the undertaking made by the Centre to bring the states on board to launch GST, to compensate them for any revenue shortfall.
The average monthly compensation to states is estimated at about ?9,500 crore. States’ own GST collections have slid, and central devolutions would shrink due to the shortfall in tax revenues, direct and indirect. Given that states account for more than half of the total general government expenditure, the Centre on-lending its market borrowings to them is the best way to revive the economy. The Centre should not waffle on compensating the states for any shortfall in GST collections.