States May Face Rs 1.23 Lakh Crore Revenue Gap After GST Compensation Withdrawal
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

States May Face Rs 1.23 Lakh Crore Revenue Gap After GST Compensation Withdrawal


States may be faced with consolidated revenue gap of up to Rs 1.23 crore on account of withdrawal of GST compensation as the transition period for the new indirect tax ends on June 30, 2022, a report has indicated.

At the time of rollout of Goods and Services Tax on July 1, 2017, Centre had promised to compensate states for loss of revenue for five years at an agreed formula.

"If the GST compensation is withdrawn after June 30, 2022, consolidated revenue gap of states would vary between Rs 1,00,700 crore and Rs 1,23,646 crore, depending on expected tax buoyancy and reliability of data sources," the report by economic policy think-tank National Institute of Public Finance and Policy stated.

"This implies that states will need to either generate an equivalent amount of revenue from exiting sources to continue with committed expenditures and/or cut down expenditures to cope up with revenue shock in 2022-23," it added.

Due to the ongoing shortfall in overall GST collection as well as rising revenue gap between GST compensation requirement and GST compensation cess mobilisation, timely release of GST compensation has become a matter of contention between the union and state governments.

According to the report, the withdrawal of GST compensation and fall in overall State GST collection will have substantial impact on the finances of Punjab, Odisha, Goa, Chhattisgarh and Karnataka, among major states. Among minor states, substantial revenue gap is expected for Himachal Pradesh, Uttarakhand, Tripura and Meghalaya.

Many states have approached the 15th Finance Commission for possible extension of the GST compensation period by another three years—up to 2024-25.

"Any shock to state finances due to withdrawal of GST compensation after the GST transition period may have profound impact on India's fiscal management and therefore macroeconomic stability," the report stated.

It pointed out that even if the GST compensation period is extended beyond June 30, 2022, the Centre may not have adequate fiscal space to provide GST compensation to states at the ongoing annual growth rate of 14 percent, unless either tax buoyancy and/or nominal growth rate of gross domestic product improves.

To provide GST compensation to states, GSTCC was introduced along with GST on some specific items to mobilise resources for the GST Compensation Fund. The union government manages this fund.

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