Compensation-cess unlikely to be available for long

The shortfall is estimated at Rs 1.59 lakh crore in the current year despite strong GST receipts in recent months.

Given the absence of a clear commitment by the finance minister, the Center is apparently reluctant to compensate states for revenue shortfall beyond June 2022. The government has emphasized that collections from the cess by March 2026 will be required to repay borrowings that states have been made to make up for the shortfall in revenue.

While some chief ministers are of the view that the discussion on compensation has been deferred to the next meeting and the Center will come up with a proposal, noting how the FM and the revenue secretary have repeatedly stressed on the law that payment of compensation To be done for just five years, it seems impossible. As said by a minister, if the issue of compensation is to be discussed by a GoM, the Finance Minister must have made it clear. While it may soften its stance later, it appears that states will have to learn to live without compensation for revenue shortfalls after July 2022.

While it is true that GST revenues have been quite strong over the past few months, and revenues from other sources should also increase as the economy recovers, given the weak state of finances of some states, the Center has to give them their due, at least for the time being. should support. few years. The fact is that the states should not be short of resources to make meaningful capital expenditure given the initial reforms. If not up to 14% – the current level of annual revenue growth is projected – the Center can provide some support. It is true that they have been allowed additional borrowings, but this will put pressure on their balance sheets. State GST (SGST) has accounted for two-fifth of the total own tax revenue of the state governments in the last three years. At the same time, it is also true that the income of the cess has been reducing by the amount required to compensate states since FY21, with the gap widening dramatically in FY21. The shortfall is estimated at Rs 1.59 lakh crore in the current year despite strong GST receipts in recent months.

A significant revelation that took place at the 45th GST Council meeting in Lucknow is that the revenue neutral rate, which was originally envisaged at 15.5%, has actually come down to 11.6%. This is not surprising given the many arbitrary deductions and ‘rationality’ for which both the states and the Center must accept responsibility. While it will not be easy to hike rates in view of the pandemic, the GoM, which is looking at rationalization of the rate structure, should try and cut the number of rates. In the Lucknow meeting, some reforms were made in the context of reforms in the reverse duty structure. In addition, steps have been taken to prevent theft by small food shops, which are expected not to be liable to pay taxes.

But, even though the weak state of the economy is a deterrent, we should aim to strengthen the GST structure in the not-too-distant future. At present, it will be difficult to remove any product from the 28 per cent slab. One should not expect that petroleum products will soon be brought under the ambit of GST; The subject was on the agenda purely because of the Kerala High Court order. Neither the state nor the Centre, which is now a lucrative revenue source, would not want to give up. The formalization of the economy has helped boost GST collections, and these can be further increased through better compliance, plugging leakages and strengthening technology.