GST Council meeting debates revenue shortfall of states

A crucial meeting of GST Council on compensating states for revenue shortfall began on Thursday with states ruled by n-NDA parties opposing Centre's move to ask states to borrow to meet deficit.

41st meeting of Goods and Services Tax (GST) Council headed by Union Finance Minister Nirmala Sitharaman and comprising representatives of all states, held deliberations via video conferencing on ways to make up for shortfall in states' revenues, sources said.

While Congress and states ruled by n-NDA parties pushed for Centre meeting its statutory obligation of covering deficit, Union government cited a legal opinion to say it had such obligation if re was a shortfall in tax collections.

Centre as well as BJP-JD(U)-ruled Bihar were of opinion that states should borrow to make up for shortfall in tax revenues that have been compounded by COVID-19 crisis, sources said.

options being deliberated at GST Council meeting include market borrowing, raising cess rate or increasing number of items for levy of compensation cess.

Discussion on correction in inverted duty on certain goods like textiles and footwear may also happen, y said.

Setting tone for meeting, West Bengal Finance Minister Amit Mitra on August 26 wrote to Sitharaman saying states should t be asked to borrow from market to make good shortfall in GST revenue collection.

" Centre must pay compensation from different cesses that it collects, as it is t getting devolved to states. In case of a shortfall it is responsibility of Centre to garner resources for fully compensating states, as per formula agreed upon with states," Mitra wrote.

In 2017, 28 states agreed to subsume ir local taxes such as VAT into new, nationwide Goods and Services Tax (GST), in what was hailed as biggest tax reform.

At that time, Centre had promised to compensate states for any revenue loss for five years from a pool created by levying cess over and above GST on luxury and sin goods.

GST collections including that of compensation cess had been falling short of targets even before pandemic, making it difficult for Centre to compensate states. States are supposed to receive half of GST receipts.

While kitty of GST compensation cess may have lagged targets, Centre has raised cess on items such as petrol and diesel, which have been kept out of GST regime. This collection, which totals to several thousand crores of rupees, is t shared with states.

Mitra wanted Centre to make good losses to states from this collection.

"Under circumstances, states should be asked to borrow from market as it will increase ir debt servicing liability. Furr, it may lead to cut in state expenditure which is t desirable at this juncture when ecomy is witnessing severe recessionary trend," he wrote.

Stating that re can be going back on compensation payment, Mitra said 14 per cent rate is "sacrosanct".

At GST Council meeting on Thursday, West Bengal was joined by Punjab, Kerala and Delhi in asking Centre to make up for shortfall, sources said.

y said Sitharaman was citing an opinion of Attorney General K K Venugopal that stated Centre is t legally bound to make up from its coffers any shortfall in GST revenues of states.

Centre had in March sought views from Attorney General on legality of market borrowing to make good shortfall in compensation fund -- a corpus created from levy of additional tax on luxury and sin goods to compensate states for revenue shortfall arising from ir taxes being subsumed into GST.

AG had also opined that GST Council has to decide on making good shortfall in GST compensation fund by providing sufficient amount to be credited to corpus.

Sources said options before Council for meeting shortfall could be to rationalise GST rates, cover more items under compensation cess or increase cess, or recommend higher borrowing by states to be repaid by future collection into compensation fund.

Under GST law, states were guaranteed to be compensated bi-monthly for any loss of revenue in first five years of GST implementation from July 1, 2017. shortfall is calculated assuming a 14 per cent annual growth in GST collections by states over base year of 2015-16.

Under GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs. On top of highest tax slab, a cess is levied on luxury, sin and demerit goods and proceeds from same are used to compensate states for any revenue loss.

GST Council has to decide how to meet shortfall in such circumstances and t central government, according to sources.

payment of GST compensation to states became an issue after revenues from imposition of cess started dwindling since August 2019. Centre had to dive into excess cess amount collected during 2017-18 and 2018-19.

Centre had released over Rs 1.65 lakh crore in 2019-20 as GST compensation. However, amount of cess collected during 2019-20 was Rs 95,444 crore. compensation payout amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18.

(Photo Credit: Twitter/FinMinIndia)