The compensation demands require to be met on a bi-monthly basis and the funds for any two-month period used to be transferred to states by the end of the following month, which means the amounts August-September should have reached the states’ coffers by October-end.
For the first time since the goods and services tax (GST) was launched, the Centre has started ‘defaulting’ in payment of the constitutionally guaranteed compensation amounts to several state governments for their GST revenue shortfall. This reflects a big and yawning revenue deficit and the growing inadequacy of the stagnant proceeds from the relevant cesses to bridge it.
Finance ministers or people in charge of tax revenue from at least half a dozen states namely West Bengal, Kerala, Punjab and Puducherry have confirmed that their latest claims for compensation haven’t been addressed in time. While Opposition-ruled states are more vocal about the delay in payments, the BJP-ruled ones were tight-lipped. West Bengal finance minister Amit Mitra told FE that his state hasn’t yet received the compensation claimed of Rs 1,434 crore for August-September. The compensation demands require to be met on a bi-monthly basis and the funds for any two-month period used to be transferred to states by the end of the following month, which means the amounts August-September should have reached the states’ coffers by October-end.
Kerala finance minister Thomas Isaac had tweeted on Saturday, “The state government has not so far received GST compensation for October (concerning August-September period), pushing the treasury into severe ways and means crisis. It is unfortunate that the Union Government is insensitive to needs of state finance. Remember GST compensation is a statutory right of the states.”
As the chart shows, the states’ average compensation requirement has shot up from Rs 5,800 crore/month in FY19 to Rs 17,350 crore/month in the April-October period of the current fiscal. Inflows into the cess kitty, however, remained stagnant at a little over Rs 8,100-crore/month. According to a rough estimate by FE, the compensation cess shortfall for the whole of the current financial year could be Rs 30,000 crore-35,000 crore, if the current trend of collections continues — it likely will — for the remaining part of the year.
A senior tax official on condition of anonymity had told FE earlier the likely cess receipts this year might be enough for bridging the states’ GST revenue shortfall only till December. The gap widened to roughly Rs 10,000 crore per/month since July, he had added.
What could be more worrisome for the states is that the Centre is under no legal obligation to make up for the shortfall by dipping into the Consolidated Fund of India if the proceeds from the cesses meant for bridging the states’ GST revenue deficit turn out to be insufficient.
The states are constitutionally guaranteed of a 14% y-o-y growth in GST revenue over the FY16 base, which means that the combined average monthly GST revenue of all states must be Rs 55,900 crore this fiscal. Against this, the state GST (S-GST) revenue in the April-October fiscal was just Rs 38,550 crore/month.
As reported by FE earlier, the GST collections in October — concerning mostly September transactions — came in at Rs 95,380 crore, 5.29% lower than in the year-ago month, amplifying concerns over a likely big deficit in revenue from this comprehensive indirect tax and cementing the notion that economic slowdown is barely being reversed.
The September GST collections were just Rs 91,916 crore, a 19-month low, and these were 2.7% lower than the year-ago month. There was only one more occasion since GST’s April 2017 launch the collection for any month declined from the year-ago month — in August 2018.
The low October GST mop-up was despite the fact that as the month that follows the middle point of the fiscal, October is believed to be a high-revenue month for the government, rivalled only by April, that follows the end of fiscal. Collections in October 2018 were Rs 1,00,710 crore and there were only six more months when the overall GST revenue crossed the Rs 1-lakh-crore threshold.
Recently, talking to a group of journalists here, finance minister Nirmala Sitharaman said that November GST collections could be “better” than in the recent months.
The GST cesses apply on transactions where GST is already levied at the highest rate of 28%, including those of pan masala, tobacco and tobacco products, aerated waters, motor cars and certain large motor passenger vehicles and coal.
According to sources, one possible solution to the issue of inadequacy of the cess kitty could be to impose cesses on items that aren’t currently taxed at 28% but are not of a mass consumption nature. While cess is collected from items in the highest tax slab, the law doesn’t prohibit levying the same on other items.