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Sunday, October 17, 2021

Burdening the states

Centre’s refusal to compensate for GST shortfalls could impart contractionary fiscal impulse to economy.

By: Editorial |
Updated: August 28, 2020 8:34:11 am
The FIR against Rhea Chakraborty, Rajput’s friend and prime accused in the FIR filed in Patna, cites serious sections of the IPC, including abetment to suicide.

The economic fallout of the COVID-19 pandemic has deepened the faultlines in Centre-state fiscal relations. A key sore point that has emerged in recent months is that of compensating states for the shortfall in their protected GST revenues — collections from the compensation cess will not be enough to offset the shortfalls this year. The options that the Centre has now presented to states — allowing them to borrow the amount of the shortfall through an arrangement with the RBI, facilitated by the Centre — suggests that rather than taking the burden of compensating states on itself, as was originally promised, the Centre has shifted the weight of meeting the shortfall in collections to the states. While the states have requested for a seven-day period to think this over, they may have no option but to accept these terms. However, shifting the burden on to the states is tantamount to the Centre reneging on its promise of protecting their revenues. It strikes at the very foundation of the original agreement between the Centre and states on GST.

As per the Finance Ministry, the shortfall in state GST collections this year is likely to be around Rs 3 lakh crore. Of this, Rs 65,000 crore will be collected through the cess route, implying a shortfall of Rs 2.35 lakh crore. The compensation due, but not paid to states, for the April-July period stands at Rs 1.5 lakh crore, as against cess collections of only Rs 14,482 crore in the first quarter of the current financial year. To bridge this growing gap between cess collections and GST shortfalls, state finance ministers had laid out several alternatives. Some proposed that the GST Council be allowed to raise funds, securitised against future cess collections. Others had suggested increasing the cess levied on products. Another option, one preferred by several states, was for the Centre to borrow the funds and transfer to the states. While these options have been debated upon for several months, the Centre has rejected all of them.

For states, revenue from GST accounts for roughly a third of their revenue receipts in 2019-20 (BE). Thus, any reluctance on their part to borrow more to finance these shortfalls (it would add to their debt burden), coupled with further shortfalls in flow of resources to them (tax devolution is likely to be lower), would force them to cut back on spending, imparting a contractionary fiscal impulse to the economy, at a time when there is a growing clamour for loosening the purse strings. At the current juncture when states are at the forefront of fighting the pandemic, the Centre should have assured them of adequate funds.

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