Budget 2022: States Seek GST Compensation Till 2027, Untied Borrowing And More

Some of India's states have asked the central government to extend the GST compensation cess for five years, citing revenue shortfall and pending dues.

Delhi, Chhattisgarh, West Bengal, Rajasthan and Tamil Nadu were among the states that sought extension of the compensation cess levy till 2027, their ministerial representatives told reporters after attending a pre-budget meeting with Union Finance Minister Nirmala Sitharaman on Thursday.

The centre and states have already agreed, under the aegis of the GST Council, to extend the cess and gather more revenue to make up for the revenue shortfall in the Covid-affected years.

In 2017, when the Goods and Services Tax was introduced, in return for giving up their taxation rights states had been assured, via a constitutional amendment and law, that the centre would compensate them for five years for any shortfall in revenue, assuming a 14% increase in states' indirect tax revenue per year. The centre has since levied a compensation cess on luxury items and sin goods to fund this constitutional promise.

This was not the only tax issue discussed at the meeting. Palanivel Thiaga Rajan, finance minister of Tamil Nadu, speaking after the meeting, said he called for correction in centre-state imbalances. He cited the increase in new cesses and surcharges and the consequent reduction in states' share of taxes. Cess and surcharge collections do not form part of the divisible pool of taxes. Cesses and surcharges as a proportion of the gross tax revenue of the centre have almost tripled from 6.26% in 2010-11 to 19.9% in 2020-21, the minister pointed. In effect, states are deprived of a share in approximately 20% of the revenue collected by the centre, he said.

This has led states to rely more on grants, which are discretionary and tied to meeting certain criteria, he added. Thiaga Rajan also reminded the centre to pay pending tax and grant dues.

Among those who attended the meeting were chief ministers, deputy chief ministers, state finance ministers, and senior officers from the central and state governments.

States also sought an increase borrowing limit without conditions.

In 2020-21, the central government allowed states to increase their fiscal deficit from 3% to 4% of the gross state domestic product. A room of another one percentage point was available to states implementing four specified reforms: under ease of doing business, urban local bodies and power distribution and one nation, one ration card.

Representatives of Rajasthan and West Bengal asked for a higher share of funds on centrally announced schemes, and also the funds allotted and not released yet to support their fiscal calculations.

States such as Tamil Nadu, West Bengal and Delhi also called for a review of the increase in GST from 5% to 12% for the textile and apparel sector Jan. 1.

The matter will be discussed at the 46th GST Council Meeting scheduled for Friday, Dec. 31.