With states building pressure on the Centre for release of pending GST compensation, all eyes are on the GST Council meeting scheduled on December 18

In the first week of December, Punjab's finance minister Manpreet Badal left for New Delhi after threatening to move the Supreme Court if the Union government failed to release the Goods and Services Tax (GST) compensation due to the state. In the national capital, Badal was to be joined by the finance ministers of other non-NDA states, such as Rajasthan, Delhi, West Bengal, Kerala and Chhattisgarh, for a meeting with Union finance minister Nirmala Sitharaman to push for the release of GST compensation committed to the states over shortfall of revenues.

Badal's views on GST compensation are now being echoed by Kerala's finance minister T.M. Thomas Isaac. State governments say the Centre is due to pay them compensation totalling to about Rs 50,000 crore. The issue is expected to be raised again at a meeting of the GST Council scheduled on December 18. While the delay in releasing the compensation has riled non-NDA states, one of their finance ministers claimed: "Even BJP-ruled states are feeling the pinch, but are not speaking out."

Bihar deputy chief minister Sushil Kumar Modi, who also handles the finance portfolio, has said it is time states look at ways to increase their compensation by bringing more items in the ambit of cess under GST. Modi heads the Group of Ministers (GoM) on Integrated Goods and Services Tax (IGST). If the cess ambit is indeed increased, it would be a first since GST came into effect.

On an average, GST makes up 35-50 per cent of a state's revenue. Other revenue sources include stamp duty on real-estate transactions, excise on liquor sales and taxes on petroleum products and electricity. To arrive at a consensus, it had been committed that the Union government will compensate the states if their annual revenue growth dips below 14 per cent. The compensation is to be paid bimonthly, and is due since the August-September period. In November 2019, while cess collection was to the tune of Rs 7,727 crore, the states' claims were to the tune of Rs 14,000 crore. The Union finance ministry has been considering options on how this gap can be filled.

In a conversation with INDIA TODAY, Badal signaled at softening of stance, saying that the states were ready to stand by the Centre provided it shares the correct position on GST compensation. He said that as per the Supreme Court's orders, the Punjab government has been compensating farmers at the rate of Rs 100 per quintal for not burning stubble. He said that while this will cost the exchequer Rs 250 crore, there is also an expected dip in devolution of funds as the Centre has slashed corporate tax from 30 per cent to 22 per cent. Most state governments, including Punjab, did not budget for this.

"Irrespective of our ideologies, both the Centre and the states need to work together towards the goal of development of the country and its people," Badal said. "We offered our support to the finance minister along with some solutions. We have to honour the commitments made to our people. We cannot stop [building infrastructure, such as] schools, hospitals and jails."

Punjab says GST compensation to the tune of Rs 6,100 crore is due from the Centre since August 2019. For a state like Punjab, this is a huge sum-particularly because the state had estimated a generation of Rs 17,100 crore through SGST, or State Goods and Services Tax, with a projected growth of 22.8 per cent. However, the prevailing economic slowdown has hit the state hard and upset revenue calculations.

A top Union finance ministry official told INDIA TODAY that the GST Council has three options-increase the cess, increase the base of the cess or have states give up on the compensation. Cash-strapped states, however, rule out the third option and suggest that the Centre print more currency and do further devolution to the states or incur debt and fund the compensation. "States cannot extend their debt limits. We told the Union finance minister that the Centre can still help the states," said the finance minister of one state.

All the options are inflationary, and some are out of the prescription list in times of the prevailing economic slowdown. It is unlikely that the Union government will go for printing of additional currency or extend its debt limit. The only options appear to be to alter the cess slabs and the ambit of cess. The spotlight is now on the forthcoming GST Council meeting.