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More run-ins likely over FY22 GST compensation
February, 12th 2021

Unresolved questions about goods and services tax (GST) compensation to states for the next fiscal year are expected to generate heat when the GST Council meets this quarter. States point to depleting tax revenues and the Centre’s promise to compensate them for the loss, even as the Union government struggles to raise revenues.

In FY21, the Centre had agreed to borrow and pass on the money to states to meet their revenue gap as promised under the GST law, and extend the GST compensation cess beyond 30 June 2022 for this purpose. However, states are getting restless with covid-19 continuing to wreak havoc on their revenues and the Union budget making no mention of how states will be compensated for an anticipated GST revenue gap next fiscal year.

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The assured GST revenue target of the states guaranteed by the Centre will go up by 14% in FY22 and again in the first quarter of FY23. The GST compensation cess fund will not be sufficient to meet this. So, the council has to decide whether or not to extend the current arrangement for making up for the GST shortfall of states with debt.

The GST Council has to decide on deferring part of the compensation payment for FY22 and the June quarter of FY23 for a later period, as well as offering liquidity support by way of debt for that period, a government official said on condition of anonymity. The Council will meet before March end though a date is yet to be decided, said another official, who also spoke on condition of not being named.

The Fifteenth Finance Commission (FFC) estimated that states will face a total GST revenue shortfall of 7.1 trillion in FY21, FY22, and the June quarter of FY23 from the guaranteed revenue target, way above the 2.25 trillion that the GST compensation cess fund will accumulate in the period.

State finance ministers have been arguing that after July 2017, the incidence of indirect taxes has gone down significantly, as much of it has been subsumed into GST.

Kerala finance minister Thomas Isaac said in an interview last month that the most important thing for the next GST Council meeting would be a discussion on the changes required. “There is a drastic decrease in incidence of indirect tax after GST was introduced. All states are interested in increasing their revenue. Nobody is in a mood for a rate cut. There is rationale for a tax rate increase to achieve revenue neutrality on account of GST implementation. Otherwise, there would be a precipitous fall in revenue collection when GST compensation ends," Isaac said.

For the current fiscal, the Centre is borrowing 1.1 trillion under a special Reserve Bank of India facility that is being transferred to states. No borrowing under this head is projected for the next fiscal in the Union budget for FY22.

 
 

The FFC has said it expects the cess levied on luxury and sin goods to continue in some form till FY26 in view of the cash requirement. The commission also noted that the GST rollout in 2017 had a significant impact on the Centre’s fiscal health. Excluding the GST compensation cess, Centre’s indirect tax revenue dropped to 4.31% of gross domestic product (GDP) in FY20 from 4.99% in FY18.

GST revenue receipts will stabilize in the coming months because of a host of factors, experts said. With significant legislative changes such as restrictions on use of unmatched input tax credit, e-invoicing across taxpayers and more sectors of the economy such as hospitality, entertainment, and mobility opening up further across states, GST collections can be expected to stabilise and improve in the coming months, said M.S. Mani, senior director, Deloitte India.

“The economic survey has estimated a GDP growth of 11% for FY22, which should also assist in GST collections for the next fiscal, in addition to the various measures taken to curb evasion and increase compliance," said Mani.

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