With the states requiring funds to meet their expenditure at the onset of the second half of the financial year, pending compensation dues to the tune of over Rs 2 lakh crore are expected to be the contentious issue in the discussions with the Centre in the upcoming 42nd Goods and Services Tax (GST) Council meeting slated for Monday.
While some of the 21 states which have already agreed for the option 1, involving borrowing of Rs 97,000 crore through a special window, have asked for expediting of the borrowing process and extension of the levy of compensation cess beyond the five-year transition period ending June 2022, Opposition-ruled states are still in disagreement with the options offered by the Centre to bridge the compensation gap.
Bihar’s Deputy Chief Minister Sushil Kumar Modi in a letter to Union Finance Minister Nirmala Sitharaman on Saturday said that the Centre should act fast in the matter and enable those states who have listed their choice to borrow. “With GST revenue turning negative and the compensation having been delayed, I need not impress upon you the fact that all the states are in urgent need of funds. We will very soon be entering the second half of the current fiscal year and all of us need to do a lot of catching up on the activities planned for the current year and which have been on hold due to lack of sufficient funds…availability of funds, even if the same are in the form of debts, will enable cash-strapped states to once again kick start the development process which has come to a halt in the face of the ongoing pandemic,” he said.
The Centre had enlisted support of 21 states and Union Territories for option 1 under its borrowing plan to meet this year’s compensation deficit. Among the remaining 10 Opposition-ruled states, Kerala, Punjab and Chhattisgarh have already voiced their concerns that the majority view of the ruling party at the Centre is being adopted as the choice for all, even as these 10 states have still not opted for the borrowing options.
A renegotiation of the terms of the two borrowing options offered by the Centre in the previous Council meeting could happen with several states, including those who have already agreed for option 1, having conveyed their concerns about the assumption of 10 per cent revenue growth in calculation of the estimates for compensation cess shortfall and the resultant borrowing amount, a senior government official said.
The Centre’s estimates have pegged the GST compensation requirement to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore — an estimated compensation shortfall of Rs 2.35 lakh crore (assuming a 10 per cent revenue growth over last year). Some states have pointed out the assumption of 10 per cent revenue growth for calculating revenue loss on account of implementation of GST could be high, given that gross GST revenue growth in FY20 was only 3.8 per cent as compared with FY19.
In the previous GST Council meeting held on August 27, the Centre had proposed two options to the states: to either borrow Rs 97,000 crore (shortfall only on account of GST implementation) from a special window facilitated by the Reserve Bank of India or the complete shortfall of Rs 2.35 lakh crore (including Rs 1.38 lakh crore shortfall due to Covid-19 pandemic) from the market.
The dependence of states on compensation payments as a share of the protected revenues, or the amount they are entitled to get as per the GST (Compensation to States) Act, has shot up to nearly 58 per cent in April-July from 24.2 per cent seen in the previous financial year, with states such as Punjab, Himachal Pradesh, Uttarakhand and Chhattisgarh among the worst affected.
GST compensation to states has been pending for this financial year, amounting to Rs 1.5 lakh crore till July. Out of this pending payment of Rs 1.5 lakh crore, the states with the biggest chunk of pending payments are: Maharashtra (Rs 22,485 crore), Karnataka (Rs 13,763 crore), Uttar Pradesh (Rs 11,742 crore), Gujarat (Rs 11,563 crore) and Tamil Nadu (Rs 11,269 crore).