GST compensation confusion grows
Finance minister Nirmala Sitharaman has said the Centre will pay the compensation dues arising from the shortfall in goods and service tax (GST) collections to the states in two instalments.
The issue had turned controversial after several states accused the Centre of cheating them out of their legitimate dues — especially with respect to GST compensation — and a media report suggested the government might not be able to fully compensate the states this year because of the poor collections of GST cess.
A feisty finance minister, who was replying to a debate on her recent budget, tried to rubbish the media report.
“In the Budget Speech, I have given a clear paragraph to say that in two instalments, I shall clear what has been collected till now, even dues drawing from the earlier years in respect of the compensation,” she said.
It could not immediately be ascertained how much of the GST compensation would be paid out for the year 2019-20.
In her budget speech, Sitharaman had said: “It is decided to transfer to the GST compensation fund balances due out of the collection of the years 2016-17 and 2017-18, in two instalments. Hereinafter, transfers to the fund would be limited only to collection by way of GST compensation cess.”
Sitharaman seemed to be quibbling over her figures once again. The reason is that during a debate in the Rajya Sabha on December 12 last year, the finance minister had said that the total GST cess collected in 2017-18 was Rs 62,596 crore of which Rs 41,146 crore was released to the states. The remaining amount had accumulated in the Cess Fund.
In the following year, that is 2018-19, a sum of Rs 95,081 crore was collected and Rs 69,275 crore was released to the states. But she mysteriously added that the “cess accumulated in the Fund was zero.”
If the government now says that the transfers to the fund will be limited to collections by way of the GST compensation fund — and the fund corpus is now zero — then there will be legitimate questions about how much the states will get and whether the Centre will renege on its promise to compensate them for any shortfall in revenue collections in the first five years of the GST regime.
For the current fiscal, the finance minister said, cess collected till October 31 was Rs 55,467 crore and the cess released to states was Rs 65,250 crore. She said cess the released to the states in excess of the collection was Rs 9,783 crore.
On December 16, the Centre had released Rs 35,298 crore to states as compensation.
When the GST was rolled out on July 1, 2017, states were promised through appropriate legislation that they would be compensated for the loss of revenue. It was on that assurance that they had agreed to subsume their taxes including VAT under GST and also gave up their right to levy state taxes on goods and services.
The compensation amount was fixed at 14 per cent on top of revenue collections with 2016-17 set as the base year. The corpus for paying compensation was collected by levying a cess on top of the GST rates on tobacco products, cigarettes, aerated water, automobiles, and coal.
According to credit rating agency Icra, there could be a shortfall of around Rs 15,000-25,000 crore in the compensation fund in the current fiscal.
The finance minister’s confidence on clearing the dues stems from the fact the Centre has collected over Rs 1 lakh crore in the GST over the past three months which, she said, was a sign of recovery.
According to the think-tank, National Institute of Public Finance and Policy (NIPFP), states might be facing a consolidated revenue gap of up to Rs 1.23 lakh crore on account of the withdrawal of compensation after the five-year GST transition period ends on June 30, 2022.
“This implies that states will need to either generate an equivalent amount of revenue from exiting sources to continue with committed expenditures and/or cut down expenditures to cope up with revenue shock in 2022-23,” a NIPFP report said.
The budget document estimates that the compensation cess collection in 2020-21 would be to the tune of Rs 1,10,500 crore.