GST Council Meet: Government Sees Compensation To States At Rs 2.7 Lakh Crore In FY22

The government estimates to pay a GST compensation of Rs 2.7 lakh crore to states for 2021-22, according to a senior Finance Ministry official, who spoke to BloombergQuint on condition of anonymity. The compensation amount, collected via cess imposed on goods and services, is to be paid out by the central government to states as per an agreement signed at the time of implementation of the Goods and Services Tax.

The GST Council, which meets on Friday for the first time in nearly seven months, is likely to discuss the potential shortfall in GST compensation cess likely to be collected in FY22. Ahead of that, the centre has made its own assessment, which will now be circulated across states.

According to a News Rise report, the shortfall in collections is likely to be to the tune of Rs 1.6 lakh crore. BloombergQuint could not independently ascertain this.

The council meets against the backdrop of the second wave of the pandemic which threatens to impact the economy and, in turn, central and state government revenues.

According to the official quoted above, the estimated shortfall in compensation cess collection is not entirely a reflection of the state of government revenues. It also reflects the 14% compounded growth in GST revenues promised to states as part of the agreement, the person said.

This is the second year that a shortfall in compensation cess collections has emerged.

In 2020-21, the centre partly compensated states by borrowing Rs 1.10 lakh crore through a special window and transferring it to states as back-to-back loans. The council also agreed to extend the period for which the cess would be imposed beyond the five years originally planned. The decision came after much back and forth.

The council, at its meeting, will also discuss the mechanism of borrowing to meet the shortfall in FY22. Some part of the shortfall, but not all of it, is likely to be met through borrowings.

The government will consider whether a mechanism similar to last year is required, said a second Finance Ministry official. In FY21, the central government borrowed 3-5 year funds from the market and passed them on as back-to-back loans to states. The average rate at which we were able to borrow under the special window was 5% or less than that, this official said.

Devendra Kumar Pant, chief economist at India Ratings and Research, estimated the government may be looking at a compensation cess shortfall of close to Rs 2 lakh crore in the current financial year.

“GST collection has been above Rs 1 lakh crore for the past seven months but the major reason for that was steps taken to correct compliance issues and the current growth buoyancy may taper off in the second-half of the year,” Pant said. He added that the impact of the second wave and any third wave of infections remains uncertain.

Covid Relief Measures

On the council’s agenda is also providing tax relief on Covid-19 related items with several states demanding exemptions and reductions.

According to the second Finance Ministry official quoted above, the council will discuss tax rates on key drugs and equipment used in the treatment of Covid-19, including reducing the rate of GST on oximeters, medical grade oxygen and drugs such as Remdesivir.

Currently, both oxygen concentrators and Remdesivir, a drug used to treat Covid-19 patients, attract a GST of 12%. Vaccines attract a GST of 5%. The government has, however, reduced customs duty on some items such as oxygen concentrators, among others.

Earlier this month, Finance Minister Nirmala Sitharaman defended the government’s decision to tax Covid-19 related drugs and equipment. Sitharaman argued that if full exemption from GST is given, domestic producers would not be able to claim input tax credit and that the government had already provided relief on a number of items.

Recently, the Delhi High Court quashed a May 1 notification of the Ministry of Finance which said that a 12% Integrated GST will be levied on oxygen concentrators imported for personal use or received as gift.

The council is likely to take a call on this issue as well, the second official official said.

However, even before the council has met, Punjab’s Finance Minister Manpreet Badal, in a letter to the Finance Minister on Monday, termed the agenda for the meeting as inadequate. Badal highlighted the need to reduce GST on key items such as thermometers, hand sanitisers, Covid test kits, nebulisers, and on the vaccines. Separately, Badal has called for the appointment of a vice-chair for the GST council from within state government representatives, to ensure its federal structure.

(Corrects an earlier version that misstated likely compensation amount as compensation cess shortfall)