Explained: As states push for extending compensation, what to expect on Day 2 of GST Council meeting

Why are states demanding an extension of compensation?

States/ UTs such as Tamil Nadu, Kerala, Uttarakhand, Chhattisgarh, and Delhi have asked for an extension of the compensation regime. Some Opposition-ruled states have also suggested tweaking the revenue sharing formula under the indirect tax regime.

“The consequences of inflation, the cracking down on states’ borrowing and states’ spending by the Union, the thing to do with conscience is to extend compensation. I have said it before 3-4 times, will say it again, the consequences for states should the compensation not be extended would be so negative, so devastating in some cases that I don’t think that the Union government would want it on its conscience,” Tamil Nadu Finance Minister Palanivel Thiagarajan told reporters before the meeting on Wednesday.

“If they (the Centre) have a conscience, or at least if they are in politics, elections are coming, I assume they will not want these negative consequences. Second thing is that if it is truly a federal structure, then the GST Council should be the one to make the opinion rather than the Union government by itself,” Thiagarajan said.

Uttarakhand Finance Minister Prem Chand Aggarwal said the state will demand an extension for compensation.

“Being a new state, we have limited sources of revenue. We will demand in the GST Council for extension of the compensation scheme or in some other way compensate for the revenue loss. We will have an annual loss of about Rs 5,000 crore,” he said.

Kerala Finance Minister K N Balagopal said, “We are looking to ask for an extension for the compensation mechanism for five years beyond June. Discussion will happen.”

Chhattisgarh Finance Minister T S Singh Deo, in a letter to Union Finance Minister Nirmala Sitharaman, said if the protective revenue provision is not continued, then the 50:50 formula for central GST (CGST) and state GST (SGST) should be tweaked, with the share of states at 70-80 per cent and CGST at 20-30 per cent.

“We are presenting the proposal in the GST Council to continue with the 14 per cent protected revenue provision. If the protective revenue provision is not continued then the 50 per cent formula for CGST and SGST should be changed to SGST 80 -70 per cent and CGST 20-30 per cent,” Deo, who did not attend the meeting due to Covid-19 infection, said.

GST rate hikes

Why are the revenue growth figures a cause for concern?

As per data on revenue growth collated for the Council meeting, the all-India average shortfall between the protected revenue and the post settlement gross SGST revenue was 27.2 per cent in 2021-22 as against 37.9 per cent in 2020-21.

In 2021-22, only five out of 31 states/ UTs — Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim — registered a revenue growth higher than the protected revenue rate for states under GST.

Puducherry, Punjab, Uttarakhand, Himachal Pradesh and Chhattisgarh have recorded the highest revenue gap between the protected revenue and post-settlement gross state GST revenue in 2021-22.

The states’ protected revenue grew at a slower rate than the guaranteed 14 per cent compounded growth in recent years and Covid-19 further increased the gap between protected revenue and the actual revenue receipt including reduction in cess collection.

In order to meet the resource gap of the states due to short release of compensation, the Centre has borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans to meet a part of the shortfall in cess collection.

Under GST, as per the Goods and Services Tax (Compensation to States) Act, 2017, the states were guaranteed compensation at the compounded rate of 14 per cent from the base year 2015-16 for losses arising due to implementation of the taxation regime for five years since its rollout.

The compensation regime will end in June.

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