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Economic slowdown puts a question mark on 14 per cent GST compensation

“With inflation hovering around 4-5 per cent and India’s growth expected to be 5-6 per cent, it will be difficult for the Union government to provide compensation to states at 14 per cent annualised rate,” a Finance Minister of a BJP-ruled state told The Indian Express.

Written by Aanchal Magazine | New Delhi | Updated: December 26, 2019 10:43:24 am
Economy slowdown puts a question mark on 14 per cent GST compensation According to data available with the GST Council, the average revenue to be protected for states in 2018-19 stood at about Rs 49,020 crore a month. (File photo)

As the Centre grapples with lower GST collections, a fresh tension now engulfs the Union Finance Minister-chaired GST Council with a certain section questioning the assumption of a 14 per cent “high” revenue growth rate covered by a compensation mechanism mentioned in the Goods and Services Tax (Compensation to States) Act.

“With inflation hovering around 4-5 per cent and India’s growth expected to be 5-6 per cent, it will be difficult for the Union government to provide compensation to states at 14 per cent annualised rate,” a Finance Minister of a BJP-ruled state told The Indian Express.

With an increase in GST rate ruled out for now, the focus has shifted to the actual growth rate of taxes collected by states, but subsumed under GST since July 2017. In the three years preceding 2015-16, the growth rate in taxes for non-special category states was just 8.9 per cent. This is significantly lower than the 14 per cent growth rate assumed over the 2015-16 base year while committing compensation.

Including the special category states, the all-India average tax growth had worked out to 10.6 per cent in the three years preceding 2015-16.

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According to data available with the GST Council, the average revenue to be protected for states in 2018-19 stood at about Rs 49,020 crore a month. The average monthly collection for states was lower at Rs 43,166 crore. This meant, the Centre made good the gap of almost Rs 6,000 crore a month, or Rs 72,000 crore a year.

GST, GST compensation, Nirmala Sitharaman, economy slowdown, Goods and Services Tax, Indian Express Had the GST growth rate assumption been less than 14 per cent, the compensation amount would have been lower.

However, in 2019-20, this gap has increased to almost Rs 13,000 crore a month, or Rs 1,56,000 crore for the year. This is more than double the previous year’s compensation, leaving the Centre hard-pressed to find resources. States have already expressed displeasure over delayed payment of GST compensation.

The Centre has estimated Rs 1.09 lakh crore as compensation cess in the Budget for the current financial year. Cess collection till November was Rs 64,528 crore. Extrapolated for the full financial year, it is expected to yield Rs 96,792 crore, which will still leave a shortfall of Rs 59,208 crore.

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Had the GST growth rate assumption been less than 14 per cent, the compensation amount would have been lower.

The state-wise breakup accessed by The Indian Express shows that only eight states out of 17 non-special category states recorded a double-digit average rate for revenue growth in the three-year period (2013-14 to 2015-16): Jharkhand (13.1 per cent), Bihar (13 per cent), Haryana (11.7 per cent), Rajasthan (11.6 per cent), Madhya Pradesh (11 per cent), Karnataka (10.7 per cent), Goa (10.5 per cent) and Kerala (10.4 per cent).

Manufacturing states like Gujarat and Maharashtra had an average revenue growth of 3.6 per cent and 9.4 per cent, respectively, while states such as Andhra Pradesh, West Bengal and Uttar Pradesh had recorded average revenue growth of 3.5 per cent, 7.7 per cent and 9.4 per cent, respectively.

While fixing the projected growth rate of compensation, the GST Council had discussed several options including considering average revenue growth achieved in three years preceding 2015-16 or five years preceding the base year or three of the five years preceding by excluding outliers or a rate equivalent to the nominal GDP growth rate of the country.

A growth rate equivalent to the nominal GDP growth rate of the country had not found favour with the Centre as it was felt that since revenue earned depends on the growth of the economy, in case, sufficient revenues are not generated due to an economic slowdown, it would not be possible to pay compensation at higher growth rates.

While chairing the first few meetings of the GST Council, the then Finance Minister Arun Jaitley had, in fact, proposed a revenue growth rate of 10.6 per cent as being closer to reality since it was the average all-India growth rate during the three years preceding 2015-16. However, GST Council meeting’s records show that the suggestion of 14 per cent revenue growth was accepted “in the spirit of compromise” to reach a unanimous agreement on the proposal.

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In the GST Council meeting held in Goa in September, the 15th Finance Commission had suggested lowering of the legally guaranteed 14 per cent annual growth rate for states in the remaining compensation period of three years till 2022. The Commission cited that the rates were fixed keeping in mind the pre-GST rates, which have been lowered significantly. States, however, had not agreed with the proposal, saying the GST rate and structure should be the prime objective of the Council instead of frequent tinkering.

GST revenues have been declining over the last few months raising concerns for both states and Centre. Barring November, GST collections contracted for previous two months, which even led to delayed compensation payments to states. Even though officers committee recommended a rate hike for revenue augmentation, the GST Council in its latest meeting decided against a rate hike as a knee-jerk reaction but instead focus on plugging leakages and curb tax evasion.

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