GST compensation gap to states could be a whopping Rs 63,200 crore

The compensation paid to states for any revenue loss due to implementation of goods and services tax (GST) is becoming a cause of concern for the central government, which is staring at a deficit of Rs 63,000 crore this year alone, going by the revenue collection trends.

According to the report submitted by a committee of central and state GST officers, the gap in the compensation could be Rs 63,200 crore if GST revenues grow at 5 per cent. So far between April and November, the GST collections have grown at 3.7 per cent. The committee estimated that the gap could increase up to Rs 2 lakh crore by 2021-22 if the growth trend remains the same.

If the revenue growth is 8 per cent, the gap between compensation required and cess collected would be 1.63 lakh crore and 1.36 lakh crore if the growth rate is 10 per cent.

Even as the committee received suggestions such as levying cess on more goods and increasing the cess on others, it believes that any increase in cess rates or base would not yield any significant revenue to reduce the gap. Although the overall GST revenue has grown 3.7 per cent in the current financial year, compensation cess has only shown a growth of 0.8 per cent.

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Compensation cess is levied for making up for any shortfall in states revenue due to implementation of GST. The short-fall is calculated assuming a 14 per cent annual growth in GST collections by states over the base year of 2015-16.

Some experts say the problem lies in the way compensation is calculated, that is, by assuming 14 per cent growth in states revenue over their 2015-16 collections.

Pratik Jain, Partner & Leader, Indirect Tax, PwC India, says: "The issue of compensation to states is becoming more complex and all stakeholders will have to try to make it a self-sustainable model so that this compensation is not needed after five years as was contemplated earlier. One option for the Centre is to engage with states to see if the 14 per cent annual growth can be renegotiated to a lower rate with increase in period of compensation beyond five years."

Even former finance minister late Arun Jaitley had insinuated in one of his blogs last year that the gap is impossible to meet. He had said then: "The targets set for the state in the GST regime are unprecedently high. Even though GST commenced on July 1, 2017, the base year for the revenue increase was considered 2015-16.  For each year a 14 per cent increase is guaranteed.  Thus, with three 14 per cent increases compounded annually over the base year of 2015-16, the amount comes close to 50 per cent for only two years.  It is almost an unachievable target."

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But the problem for the Centre is that it had promised the states to make good for any losses in revenue due to implementation of GST, and now they cannot go back on it.

For some states the loss in revenue could be very high. For example, in case of Punjab, 25 per cent of revenues in 2015-16 came from agriculture purchase tax. This tax got subsumed in GST and now they stare at a huge revenue deficit of 36 per cent. Punjab finance minister Manpreet Singh Badal said that the state agreed to getting agriculture purchase tax subsumed with GST only after the Centre's promise of compensating for the loss. "Now, the Centre is saying that it has no money to pay, and has asked us to fend for ourselves. This is like a default on Sovereign Guarantee," he said.

MS Mani, parter, Deloitte India, says that altering the 14 per cent growth rate is difficult given it is part of the states' grand bargain for agreeing to implement GST, but the same can be lowered if the Centre agrees to extend the compensation period beyond 2022.