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While the Centre Thursday chose to pin much of the blame for the delays on GST compensation payments to the slowdown inflicted by the pandemic, the delays preceded the Covid-19 shock by almost a year – when payments due for August-September 2019 got delayed. Since then, all subsequent payouts have seen cascading delays.
The economic slowdown, which has been underway for almost three years now, began to adversely impact GST revenue collections in August last year. Sequentially, the GDP growth rate slowed from 5.2 per cent in April-June 2019 to 4.4 per cent in July-September and further to 4.1 per cent in October-December, and to 3.1 per cent in January-March.
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Reflecting this, gross GST revenue slowed in August (collections for sales in July) to Rs 98,203 crore, which then posted a 2.7 per cent year-on-year contraction in September 2019 to Rs 91,917 crore and a 5.3 per cent contraction in October to Rs 95,380 crore. The GST collections again picked up in November, partly due to festive sales and, in part, due to anti-evasion measures and a provision introduced to cap input tax credit.
A cap on input tax credit at 20 per cent of the eligible credit for businesses, effective October, helped in higher collections. This cap, which was only for buyers whose suppliers did not upload invoices, was then further curtailed to 10 per cent in the GST Council meeting held on December 18.
The Centre first admitted to problems on compensation payment in the 37th GST Council meeting held in Goa in September 2019 when it stated that the amount of cess available in the compensation fund at the end of February “shall fall short for payment of compensation for loss of revenue till the bi-monthly period of December-January”.
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Then, on November 27, 2019, the GST Council wrote to states that the GST and compensation cess collections in the previous few months had become a “matter of concern” and that the compensation requirements are “unlikely to be met”.
GST compensation payments had started getting delayed by then, with many state finance ministers beginning to raise concerns about requiring to repeatedly ask for their share of revenues. The GST compensation payment of Rs 35,298 crore for August-September 2019, and due in October, was paid in December. The Centre released another Rs 34,053 crore in two instalments in February 2020 and April 2020 as compensation for October-November.
Then in June this year, the Centre released Rs 36,400 crore as GST compensation for December-February, following which the balance Rs 13,806 crore for March was released in July, taking the total compensation payout for FY20 to Rs 1.65 lakh crore.
As per GST (Compensation to States) Act, states are guaranteed revenue protection equivalent to 14 per cent compounded annual growth rate in revenues from the base year 2015-16. The law provides for bi-monthly compensation payments to states for the revenue gap from the compensation cess collections levied on sin and luxury goods.
In the wake of the increasing delays and the Centre’s admission that compensation requirements are “unlikely to be met”, at least five Opposition-ruled states/ UTs – Kerala, West Bengal, Delhi, Rajasthan and Punjab – issued a joint statement on November 20 raising concerns about this.
On December 4, Finance Ministers of seven Opposition-ruled states and Union Territories — Punjab, Delhi, Puducherry, Kerala, Madhya Pradesh, Rajasthan and Chhattisgarh — made a forceful representation to Union Finance Minister Nirmala Sitharaman demanding pending compensation, with some saying it was an embarrassment to keep asking for money due to them and Kerala warning it may even approach the Supreme Court.
