Government May Have To Bear The Brunt Of GST Shortfall To Compensate States
An Indian five rupee note and one rupee coins sit in a money collection tray at a petrol pump in Nagpur, India (Photographer: Dhiraj Singh/Bloomberg)  

Government May Have To Bear The Brunt Of GST Shortfall To Compensate States

India’s central government may have to compensate states from its own pockets this fiscal if current Goods and Services Tax collections are to go by. And that could add to the already persisting risk of a fiscal slippage.

GST collection growth in August fell to 4.5 percent, bringing down the growth in the first five months of financial year 2019-20 to 6.4 percent. That’s lower than the 10 percent growth the government has budgeted for. If the pace is maintained for the full year, the shortfall could be Rs 40,000 crore, according to Credit Suisse’s Neelkanth Mishra.

That could throw up a problem for the central government which had guaranteed a 14 percent growth in their share of GST every year. Here’s the math that Mishra presents: In 2018-19, states share of GST, including the compensation cess, was Rs 6.5 lakh crore. A 14 percent growth on this would be Rs 7.4 lakh crore. In effect, if the total GST collection growth is any short of 7.8 percent, then this gap of Rs 90,000 crore will not be filled and states’ share wouldn’t grow 14 percent.

“The rules are not clear to us, but if compensation need exceeds cess collected, the extra funds would go out from general fiscal expenses,” Mishra wrote in a recent research note. “While this is a Centre-state allocation issue, it can have a negative growth impact.”

GST take for the Centre would fall.
Neelkant Mishra, Managing Director and India Strategist, Credit Suisse

Besides, Mishra said that this could also mean narrower spread for state government bonds.

Slowing growth and consumption has already hit GST collections. Collections in August, for July, dropped to Rs 98,202 crore. The fall can be linked to the general slowdown in the industry, according to Abhishek Jain, indirect tax partner at EY India.

Agreed Rajat Mohan, senior partner at tax consultancy AMRG & Associates. According to him, job-creating sectors, such as real estate, automobile, and manufacturing, are having a “bumpy ride”—leading to an overall fall in GDP growth and worsening the purchasing power of consumers.

“Lowering of net disposable income in the hands of households is pushing them to restrict and defer their consumption, which is reflected in latest tax collections,” Mohan told BloombergQuint.

Also read: India’s Tax Collection Growth In April-June At Lowest In A Decade

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