Amit Mitra, principal adviser to the West Bengal chief minister, has urged Union finance minister Nirmala Sitharaman to extend the goods and services tax (GST) compensation to states for another three to five years beyond June 2022, to provide relief to the states struggling with fiscal consequences of the Covid pandemic.
“We note with dismay an ominous sign that the Centre has decided to withdraw the goods and services tax (GST) compensation to the states from July 2022. Such a decision, if taken, is completely contrary to what was envisaged at the time of adoption of GST,” Mitra wrote in a letter to Sitharaman.
Under the GST compensation mechanism, which is constitutionally guaranteed, state governments are assured 14% annual revenue growth for the first five years after the July 1, 2017 launch of the tax.
The Empowered Committee of the Finance Ministers of the States met in Kolkata on June 14, 2016 to deliberate on whether a GST could be adopted by the states and the Centre. All the states, across political parties, decided to adopt GST on condition that the Centre has to compensate the states for the revenue loss for five years.
“You will appreciate that in the year 2016, when the said decision was made, none of us could have predicted that the world would be hit by the Covid pandemic of this magnitude. Nor could we have guessed that the economy of the world, and of course, that of India, would be under unprecedented stress, due to this pandemic,” Mitra wrote.
The complete lockdowns followed by partial ones, during the last three years, have severely undermined the basis of the decision of the empowered committee taken in 2016, with great hope and expectations, he said.
The proceeds from the GST compensation cess fell far short of the levels required to make up for the state’s revenue shortfall from the protected level in FY21 and FY22. The Centre had to resort to taking loans under a special RBI window to bridge the deficit. Servicing of these loans will itself require the cesses to be applicable on select demerit goods till March 2026, the Centre has pointed out.
However, Mitra said: “Though we are in the third year of the pandemic, the impact of the pandemic continues to adversely affect our economy. The supply chain in manufacturing, services and agriculture is still broken. The MSME sector is struggling to survive and the informal/unorganised sector, which provides employment to more than 90% of the labour force, remains severely fractured.”
“The unforeseen battle against this pandemic has put the fiscal health of the states under huge stress. On top of that, the massive inflationary pressures have severely aggravated and impaired the economies of states, which today are struggling with massive fiscal burdens. The GDP has not yet reached the pre-pandemic level and is not likely to reach a desirable trajectory any time soon.”
Sitharaman has made it clear that the GST compensation was for the initial five years after the GST roll-out. The GST Council, chaired by her, will likely deliberate later this month on the demand by many states that the compensation period be extended by 2-5 years.