Centre Still Owes States Rs 1.36 Lakh Crore In GST Compensation Dues

The central government still owes states about Rs 1.36 lakh crore in dues on account of a shortfall in goods and services tax cess collections, according to a written reply in the Lok Sabha on Monday.

While the GST compensation dues for 2020-21 are at Rs 81,179 crore, the amount pending for April to May in the current fiscal is at Rs 55,345 crore, the response by Minister of State in Ministry of Finance Pankaj Chaudhary said.

This, despite the government paying Rs 75,000 crore to states in one shot on July 15 in lieu of the expected shortfall in GST cess in the current financial year. This amount transferred was close to 50% of the total estimated shortfall for the entire year, the Ministry of Finance had said in a release on Thursday.

The funds transferred are in addition to the GST compensation being released every two months out of actual cess collection, the government had said. The balance amount would be released in the second half of 2021-22 in steady instalments.

The GST constitutional amendment assured states of compensation for loss of revenue for five years (2017-2022), as state levies were subsumed under the common national tax. A subsequent law mandated a 14% compounded growth in states’ GST revenue every year till 2022. A cess was imposed on sin goods to fund this revenue assurance.

A sharp slowdown in the economy, however, has meant a shortfall in cess collections needed to pay out GST compensation.

Last fiscal, the shortfall in compensation cess collections was estimated at Rs 2.35 lakh crore. The central government borrowed Rs 1.1 lakh crore and passed it on to states as back-to-back loans. The rest of the shortfall, which the federal government argued was on account of an "Act of God", was to be paid out by extending the cess levy beyond June 2022. The dues being reported include this share of compensation.

In the current year, the central government decided to borrow Rs 1.59 lakh crore and transfer it to states via a mechanism similar to last years. This is over and above the Rs 1 lakh crore (based on cess collection) that is estimated to be released to states during the current fiscal.

The shortfall in cess collections has meant that the government will likely need to extend the levy of cess beyond 2024, BloombergQuint reported earlier. This extended levy will cover the dues but also repayment of the funds borrowed to pay out GST compensation in 2020-21 and 2021-22.

Separately, some states have demanded that the period of compensation be extended beyond 2022 as well. That matter, however, is to be discussed separately.