States have appealed to the 15th Finance Commission (FC) to recommend extending the time period for which they would be compensated up to 14% revenue growth in the event of a shortfall in GST collections.
States have appealed to the 15th Finance Commission (FC) to recommend extending the time period for which they would be compensated up to 14% revenue growth in the event of a shortfall in GST collections. FE has learnt that many states, which are uncertain about the trajectory of GST revenues, have asked for a further 5-year extension once the current period expires in FY22.
Bihar deputy chief minister Sushil Modi told FE, “We have submitted a memorandum to the Finance Commission for an extension.” He said this won’t impinge on the Centre’s finances but will provide a safety net for states which might need to be compensated beyond FY22.
“I personally believe that most states would not need any compensation after the third year of GST (the current fiscal) as collection growth trend becomes stronger as was the case in the third year after states implemented the VAT regime,” Modi added. Further, he pointed out that while standalone GST growth is higher than average growth in VAT collection for states over 5 years till GST, the benchmark of 14% growth was too ambitious and hence compensation was needed to remain in force for longer.
Though a change in the GST Compensation Act is not within the FC’s remit, a recommendation by it would give the necessary push to the states’ demand to the GST Council.
According to the 14% growth formula, the combined GST revenue of all states needed to be Rs 42,979 crore per month in FY 18. However, the average monthly collection for states in the first year of GST was only Rs 36,387 crore. The states were paid Rs 48,178 crore as compensation for the shortfall in FY18. Similarly, In FY19, the states were guaranteed a GST revenue of nearly Rs 49,000 crore a month. The monthly shortfall for states in last fiscal was about Rs 5,800 crore, which translated into a compensation payout of Rs 69,500 crore.
GST revenue collection for most states has shown a double-digit growth (average monthly collection in FY 19 over FY 18), some larger states’ collection is lower than 14%. Among industrialised states, Maharashtra (12.5%), Gujarat (13.4%), Haryana (17%), Tamil Nadu (11.8%) and Karnataka (17.6%) have by and large seen better growth under GST than in the erstwhile VAT regime. The situation is even better for consuming states with Rajasthan (27.7%), Uttar Pradesh (22.1%), Bihar (51%) and Madhya Pradesh (32.1%) recording steep revenue collection increase.
Extension of GST compensation mechanism would also give some comfort to states as expansion of the terms of reference (ToR) of the 15th FC last month indicated that the resources available in the divisible pool of the central taxes may shrink if the Commission recommends that a portion of the pool be kept aside for defence and internal security purposes.
The GST Compensation Act, one of the key assurances by the Centre, provides a constitutional guarantee to states that their GST revenue would grow by 14% every year (over base year 2015-16). In other words, any shortfall from the threshold will be compensated from the compensation fund.The cess collected from goods that are classified as ‘sin’ or ‘luxury’ are parked in the fund for compensation purposes.