GST shortfall: Compensation to states may continue till FY 25

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Updated: September 14, 2019 7:15:38 AM

A final decision, of course, will be taken by the GST Council, with which the Commission will converse at the former’s Goa meeting on September 20.

GST revenue, GST, GST Council, term of reference, non-lapsable fund, economy newsNK Singh, Chairman, 15th Finance Commission.

The state governments’ GST revenue shortfall may continue to be compensated till FY25, that is, for three more years after FY22, the final year prescribed under the law. However, for the post-FY22 period, the ‘shortfall’ would be estimated taking into account the fact that GST revenue buoyancy has been lower than expected. This means the annual growth rate to be assured for states will be lower than the current 14%, for the post-FY22 period.

This view seems to have emerged in the 15th Finance Commission which analysed the pros and cons of the compensation mechanism, including the “moral hazard” of guaranteeing certain revenue growth for states. A final decision, of course, will be taken by the GST Council, with which the Commission will converse at the former’s Goa meeting on September 20.

Meanwhile, addressing a group of journalists here on Friday, Finance Commission chairman NK Singh hinted at a balanced approach when it comes to deciding how the states’ share of the divisible pool of taxes would be distributed among them.

On the controversial new term of reference (ToR) that urges the Commission to consider creating a non-lapsable fund (possibly out of the divisible tax pool) to “ensure an assured allocation of resources towards defence and internal security imperatives”, Singh said, “not necessarily (would such a mechanism be recommended), but it could not be ruled out also.” He added, “We had a discussion with the defence minister. One issue is if resources become non-lapsable, then they won’t be subject to annual appropriation cycles… Issues include whether to create a special purpose vehicle for the non-lapsable fund.” Singh, however, asserted that the FC award to states from the divisible pool “has to go by the precedent of being unconditional.” Defence, he said, has another options such as monetisation of assets and spectrum (to find the additional resources required).”

When asked about protests by some states on the ToR prescribing use of 2011 census for the purpose of the horizontal devolution (instaed of 1971 census), he said, “We cannot ignore (the TOR) given to us. At the same time, we don’t intend to penalise efficiency also. The challenge is to find the right combination of equity and efficiency. I think, better demographic management can be considered for incentivisation.”

The 15th Finance Commission, whose award will be for the FT21-FY25 period, would also do iots bit to bolster the investment growth cycle, through sector-specific devolutions in some areas relating to social and physical infrastructure, Singh said.

On the assumption of the GDP growth rate by the Commission and its likely revenue buoyancy estimates, he hinted that it might assume nominal GDP rates slightly lower than outlined in the Budget’s medium-term fiscal framework.

The GST compensation fund is being created out of the cesses levied on a clutch of luxury and demerit goods that also attract the highest GST rate of 28%. Even as the GST revenue has trailed targets, the proceeds of these cesses have exceeded the requirement of compensation, and with more states witnessing improvement in their GST receipts, the surplus (equally shared between the Centre and all states) is increasing. However, the cry for continuance of the compensation, after the five year period (FY18-FY22) prescribed under law, has not abated.

For FY 18 (July 2017- March 2018), the compensation cess collected was Rs 62,600 crore, and only Rs 48,180 crore was needed for compensating the states. In FY19, the cess collection was Rs 97,370 crore and Rs 79,400 crore was distributed among states as compensation.

The 14th Finance Commission (FY16-FY20) had hiked the states’ share in divisible pool of taxes to 42% from 32%. However, the Centre’s overall transfers to states haven’t since grown at a pace faster than the Central budget size or its net tax receipts did. This is because the transfers under central-sector and centrally-sponsored schemes have been slashed in recent years. The Centre has also increased the cesses and surcharges, the proceeds of which are not required to be shared with the states.

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