Centre has no Money to Pay States their GST Compensation @14% of the Revenue Growth Target

Three years after launching of the GST, the centre has for the first time admitted that it has no money to pay the state governments their share of GST compensation as promised under the GST law.

Even before the lockdown, since August 2019, the economic situation is 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.

Ajay Bhushan Pandey, Union Finance Secretary 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.

First Meeting of the Committee

Members of the opposition in the first meeting of the committee raised the problems faced by the states due to non-release of states’ share over the past few months. The members claimed that states are making huge expenses to battle COVID-19. While also assisting migrants, those who lost jobs. Coherently, there is a severe resource crunch.

During demands for GST compensation and dues among the states, the Finance Ministry stated that the central government has released Rs 13,806 crore of GST compensation pertaining to the FY 2019-20.

Finance Ministry’s Stand on the matter of GST Compensation

During demands for GST compensation and dues among the states, the Finance Ministry stated that the central government has released Rs 13,806 crore of GST compensation pertaining to the FY 2019-20.

Explicitly, the GST Council takes decisions on such matters. Thus, it scheduled a meeting in July to discuss an alternative formula of compensation for cash-strapped states. But the council has not called such meeting yet.

The Payment Mechanism

The central government compensates states bimonthly. That is, after the inclusion of certain charges like value-added tax under the goods and services tax. The payout can only be made out of the compensation cess fund. It is guaranteed for five years, and is calculated at a growth rate of 14%; keeping 2015-16 as the base year. As indirect tax collections declined last year, the government had stopped releasing the compensation to states.

Current 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 will stand released to states.

However, notably, the total amount of compensation released for the year 2019-20 amounts to Rs 1,65,302 crore while the amount of cess collected in the year 2019-20 amounted to Rs 95,444 crore.

The Centre also stated for releasing the compensation for 2019-20 the balance cess amount collected during 2017-18 and 2018-19 also stands utilised. Moreover, Centre had transferred Rs 33,412 crore from Consolidated Fund of India to the Compensation Fund; as a part of an exercise to distribute balance of IGST pertaining to 2017-18.

As per government’s background note in the current fiscal year 2020-21, the central government has released Rs 15,340 crore to the states and  UTs as GST compensation. This was despite of a small collection due to the relief provided in terms of filing of return and payment of taxes due to nationwide lockdown.

GST Shares in Previous Years

While in Financial Year 2019-20, the central government had released Rs 1,20,498 crore GST compensation to states and union territories; as it had collected only about Rs 95,000 crore in the form of compensation cess. In the Financial Year 2017-18, a total GST compensation cess of Rs 62,611 crore stood collected; out of which a sum of Rs 41,146 crore stands released to the states/UTs as GST compensation.

In the Financial Year 2018-19, Rs 95,081 crore was collected as GST compensation cess; out of which Rs 69,275 crore stands released to the states and UTs as GST compensation. The note stated that on an average the monthly GST compensation cess requirement was about Rs 14,000 crore; while the cess collection average was only near Rs 7,000 to Rs 8,000 crore per month.

Finance Secretary’s take on the matter of GST Compensation

“14% compensation was based on the presumption that economy will grow at the rate of 12-13% and therefore the collections would also grow at that level, but we  have seen during the last few months the actual economic growth has been lesser to some extent, and accordingly this [compensation] would also get impacted. Whatever is getting collected in the fund, the centre will pay the states.”

– Pandey, in a post budget interaction with the industry earlier this year

Finance secretary Pandey informed the parliamentary panel that alternative solutions are built in the GST system to make up for low GST collection. He stated that there was constitutional commitment for the central government to provide 100 percent compensation. That 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.

On changing the formula for compensating states, the centre needs an amendment in the GST (Compensation to States) Act after approval from the GST Council. Notably, if the Centre makes amendments without approval from the council, then the states can challenge it in the courts.

About the Author

Ishan Harlalkahttp://lexinsider.com
I am a 3rd year law aspirant pursuing BA LLB. I am deeply interested in learning and am always looking forward to gain knowledge about new subjects. In my leisure time, I try to read books of various genres and by different authors. As people from non-law background may find it difficult to understand legal provisions and jargons, I try to write in a way that my articles are easy to comprehend and after reading them, one can discuss them with others.

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