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Wednesday, April 14, 2021

GST revenue shortfall: Here’s what Centre told states to deal with it

As we all know Covid-19 has left the world economy battered and every country is struggling with slump in business, unemployment, revenue shortfall and several such problems. India is no exception. In a bid to boost the economy and resolve the present crisis, the Indian government has taken several steps, right from announcing stimulus packages to launching self-sufficient production plans. In this article, we shall talk about the Centre’s latest advice to the states in order to cope with their revenue shortfall.

Here’s the Centre’s borrowing advice to states explained in 6 points

1. What did the Centre say to the states to cope with revenue shortfall?

The Centre offered the states two options to make up for the shortfall in their Goods and Services Tax (GST) revenue, estimated at Rs 2.35 lakh crore in the financial year that ends in March 2021. The crisis happened following the pandemic’s outbreak and it took a toll on the economy. State governments were given a week to make a choice to deal with the issue and it triggered anger in the leadership of some Opposition-ruled states. They said that the Centre was imposing its decisions upon them.

2. How does the Centre’s suggestion look like?

As per the Centre’s declaration, there are two options. As per the first one, the states can borrow up to Rs 97,000 crore at a reasonable interest rate from a special window which will be opened after consultation with the Reserve Bank of India. The states then can repay the amount from the cess charged on luxury and specific goods such as liquor, cigarettes, aerated water and automobiles as the GST regime completes five years of its implementation in June 2022.

GST revenue shortfall
Photo: Bloomberg Quint

According to the second option, states can borrow the entire Rs 2.35 lakh crore after consulting the RBI. Some Opposition-ruled states suggested that the Centre should borrow the money instead and compensate the states for their revenue shortfall.

3. Understanding the rules for tax front

While elaborating on the subject, finance minister Nirmala Sitharaman ruled out any general tax rate increase in near future. However, the cess on luxury and sin goods will continue after June 30, 2022, for at least another five years. “Not considering any rate increases to make up for the shortfall in cess is a welcome measure; however, moving to a market borrowing mechanism which would extend the tenure of the cess beyond five years would worry businesses that are subject to the cess,” MS Mani, partner at Deloitte India, was quoted in a report. He added that while it is important to fund the states’ compensation deficits, it is equally necessary to focus on the overall GST collection deficit.

4. When will the new measure be implemented?

The options announced by Sitharaman will be available only for this financial year. In April next year, the GST Council will review and decide action for the fifth year. As the new indirect tax regime came into force in July 2017, all states were assured a 14% hike in their yearly revenue till 2022 and it was decided that any shortfall would be made good through the cess levied on luxury goods. Both GST and cess collections have gone down due to the pandemic.

As per the Centre’s guidelines, states can exceed their borrowing limit by half a percentage point under the Fiscal Responsibility and Management Act, and can choose to borrow more than the expected compensation from the Centre. In May, the states’ borrowing limit was raised from 3% to 5%. This ensured the states additional resources of Rs 4.28 lakh crore during the crisis. Now if we look at the period from April to July, the total GST compensation to be paid to states came to Rs 1.5 lakh crore owing to the nationwide lockdown. As per the estimates, the annual compensation is expected to come to Rs 3 lakh crore, creating a gap of Rs 2.35 lakh crore. According to a report, the Centre has released over Rs 1.65 lakh crore in GST compensation to the states in the 2019-20 fiscal year.

5. How are the states reacting to this?

Some state governments governed by parties that are not in the ruling NDA alliance at the Centre have opposed the proposal.

According to a report, Delhi finance minister Manish Sisodia accused the Centre of “betraying” federalism by “refusing” to pay GST compensation to states. He suggested that the Centre should take loan from the RBI on behalf of the city government which he said is facing a revenue shortfall. Similarly, Bengal finance minister Amit Mitra wrote to Sitharaman stating that states should not be asked to borrow from the market.

The finance ministers of Congress-ruled states said they were not happy with the Centre’s decision. Punjab finance minister Manpreet Badal said. “We are not happy at the outcome. But, we have no choice,” he said. Chhattisgarh finance minister TS Singhdeo said the Centre should act as an elder in the family and ensure that states’ share of revenue from GST is protected instead of demanding it from them. The Opposition Congress accused the Centre of adopting a majoritarian approach. The Telangana government has sought the release of Telangana’s share of Rs 2,700 crore towards Integrated GST.

“All the states have joined the GST as the Centre had assured them that joining the GST will not cause any loss to the revenue of the states. The responsibility for paying GST compensation lies entirely with the Central government,” Telangana finance minister Harish Rao said in a report.

Kerala finance minister Thomas Isaac also said it was a big letdown for the states as the Centre continued to thrust its solutions on them. The finance ministers of ruling BJP-led governments demanded immediate payment of GST compensation. States like Uttar Pradesh and Madhya Pradesh come under this category.

6. What are economists suggesting?

Giving a clearer insight on the issues, economists at proposed three options for states to raise resources to make up for the shortfall in revenue from the Centre. The experts said this can be done by the Reserve Bank monetising the state’ debts, taking recourse to the National Small Savings Fund or enlargement of Ways and Means Advances.

“The Article stipulates that a State may not, without the consent of the Government of India, raise any borrowings if it has any loan outstanding, which is repayable to the Government of India. Furthermore, under the Constitution, State Governments, unlike the Centre, cannot borrow externally,” they said in a report.


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