The strain of slowing revenues and pending compensation payments to states under the Goods and Services Tax (GST) is reflecting a worsening trend in the reliance on compensation payments as a share of the states’ overall protected GST revenues. 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, government data showed, with states such as Punjab, Himachal Pradesh, Uttarakhand and Chhattisgarh among worst affected.
In FY20, 24.2 per cent of protected GST revenues of states on an average was funded by compensation, while 75.8 per cent was from State GST (SGST) and Integrated GST (IGST) revenues accruing to the states, data from the Finance Ministry, presented in Parliament showed. States such as Andhra Pradesh and Telangana were less dependent on GST compensation in the previous financial year, constituting only 13 per cent and 11.3 per cent of its GST revenues, respectively, but for Puducherry and Punjab, compensation formed about 57.3 per cent and 47.8 per cent of their protected GST revenues, respectively.
Data on compensation deficit, when extrapolated for this fiscal, shows the share of dependence on compensation payments has now worsened, rising to over 50 per cent for 26 of the 31 states/UTs.
States/UTs such as Puducherry and Punjab top the list with their reliance on compensation rising to 80.4 per cent and 71.9 per cent, respectively, but it has turned worse for even better-earning states like Andhra Pradesh and Telangana — a sign of the slowdown in the states’ own revenue earnings from GST. For instance, the share of compensation payments in the protected revenues for Andhra Pradesh and Telangana has risen to over 52 per cent each in April-July, the first four months of this fiscal. Even for states such as Maharashtra and Uttar Pradesh, the share of compensation in the protected GST revenues has risen to 56.5 per cent and 54.3 per cent from 18.3 per cent and 16.0 per cent seen in previous fiscal, respectively. A lesser dependence on GST compensation implies that states’ own GST revenues showed higher buoyancy, reducing the revenue gap to be compensated from the compensation cess collections. Now, a greater reliance on compensation is reflective of the sharp slowdown in states’ own GST revenue collections. GST compensation to states has been pending for this financial year, amounting to Rs 1.5 lakh crore till July. 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).
Under the GST (Compensation to States) Act, states are assured compensation for the gap between revenues at a compounded growth rate of 14 per cent over the base year revenue of 2015-16 and the actual revenues from GST for five years ending June 2022 through levy of cess on demerit and sin goods. 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).
In the previous GST Council meeting 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 RBI 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.
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