GST compensation period: States likely to push for five-year extension

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States are likely to request the Centre for an extension in the goods and services tax (GST) compensation period, by up to five years beyond FY22. This is driven by the severe shortfall in revenue owing to disruption in economic activity.

The GST Council is expected to meet this month to discuss alternative compensation mechanisms, amid inadequate cess collections. States may write to the 15th Finance Commission, seeking the extension. They are likely to point out the challenge in meeting routine expenditure after 2022, in the absence of any compensation.

States may discourage the Centre from reducing the outlay on Centrally Sponsored Schemes (CSS) and revenue deficit grants, even if it warrants borrowing from the markets. In addition, they may request an increase in the unconditional borrowing limit. At present, a state can go for such borrowings till its fiscal deficit hits 3.5 percent of the gross state domestic product (GSDP). States want the threshold to be raised to 4.5 percent.

However, states are divided when it comes to market borrowings. “We will write to the finance commission seeking an extension of the compensation period by five years. There is no scope to hike rates this year as we can’t burden the common man,” said Sushil Kumar Modi, deputy chief minister of Bihar.

“Since states will not burden the Centre’s exchequer with compensation in case of inadequate collection, the finance commission should consider extending the compensation period. By the time we are able to hike tax rates, the compensation period will be over,” he added.

Further, he said that the Centre should not cut down on centrally sponsored schemes and revenue deficit grants. “We are not getting compensation, so the Centre should not further burden states by cutting CSS and revenue deficit grants,” said Modi.

Punjab will also press for extension beyond 2022. “If I cannot meet my expenses, what do I do? We need the highest compensation, given that a fourth of our revenues are based on food grains that got subsumed under GST. We went ahead with GST because it was in the national interest,” said Punjab FM Manpreet Singh Badal.

West Bengal and Kerala will follow suit. The former is of view that the Council does not have any equity/security to offer for borrowing from the markets, hence the compensation period should be extended. “The GST Council doesn’t have a locus standi, how can it borrow? It doesn’t have equity and no security to offer,” said West Bengal FM Amit Mitra. His Kerala counterpart Thomas Isaac also favours an extension.

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