GST Revenue Loss: States Complain Centre Hasn’t Paid Compensation
At least four states have raised the issue of not receiving compensation for losses incurred on account of implementation of GST.
At least four states have raised the issue of not receiving compensation for losses incurred on account of implementation of the goods and services tax.
The finance ministers of Punjab, Kerala, Delhi and West Bengal have appealed to Union Finance Minister Nirmala Sitharaman to release the pending compensation from the central government.
“States are facing acute pressure on fiscals, some (are) already resorting to ways and means (advances) or even overdrafts,” read a joint statement signed by the finance ministers of the four states. Ways and means advances are given to states by the Reserve Bank of India to meet temporary mismatch between receipts and payments.
Kerala Finance Minister Thomas Isaac said the compensation scheme is the “strangest” public finance policy to be pursued in times of recessionary conditions as the state is on overdraft in terms of borrowing. “Kerala hasn’t received a (total) compensation Rs 1,600 crore for the last two months,” he said after a meeting of the empowered committee of states’ finance ministers. “It’s a way of saying that states shouldn’t depend on compensation from the Centre.”
GST was rolled out in July 2017 after subsuming 17 different indirect taxes, including locally collected value-added taxes and cesses by states. The Centre compensates states bimonthly for any shortfall they incur in the first five years of the implementation of GST considering a 14 percent growth in subsumed indirect taxes, and keeping 2015-16 as the base year.
Compensation for August and September, required to be paid in October, hasn’t been released by the central government to the states, West Bengal Finance Minister Amit Mitra told reporters today.
Compensation cess is levied on sin goods that are taxed at 28 percent. The cess ranges between 1 and 22 percent, and its proceeds are collected in a fund used to compensate states for the first five years.
GST revenues account for nearly 60 percent of the states’ tax revenues, the statement said. Many states are already facing deficits up to 50 percent of the total GST, the statement said. “Such huge deficits have the potential to disrupt the budget and planning processes in a host of areas literally bringing activities of the states to a grinding halt.”
Previously, the Centre could compensate states adequately and in a timely manner as there were provisional settlements of accumulated integrated GST, leading to lesser losses by states, a central government official told BloombergQuint on the condition of anonymity. With GST collections declining, the official said cess proceeds are inadequate to compensate states for their losses.
The compensation cess collected as of September, was Rs 46,766 crore, marginally lesser than the Rs 46,968 crore collected in the same period last year, according to data from Comptroller General of Accounts. The government expects to collect Rs 1.09 lakh crore as compensation cess in 2019-20, according to budget documents.
The Centre, in 2017-18, gave Rs 48,171 crore to the states as compensation, which was Rs 48,202 crore during April 2018-December 2018, according to a government response in Parliament.
Isaac, however, expects the share of central taxes to sharply decline due to low GST and direct tax collections and the huge concession given to corporates. Kerala has cut its public borrowing by Rs 6,500 crore in the current quarter, he said. “This is a Centre-engineered crisis in states’ finances.”
The central government can borrow [on its own] to bridge the gap between compensation cess collections and compensation payable to the states and then extend the tenure of the cess levy for one or two more years. We are not a foreign country, we (all the states) fall into the federal framework of the country.Thomas Isaac, Finance Minister, Kerala (As Told To BloombergQuint)
Manish Sisodia, deputy chief minister of Delhi, said the union territory has Rs 2,355 crore in pending dues, including arrears dating back to August, while West Bengal Finance Minister Amit Mitra said Rs 1,500-crore compensation is due to the state.
According to Punjab’s Finance Minister Manpreet Singh Badal, compensation due to the state is Rs 2,100 crore. Another Rs 2,000 crore worth arrears is due to the state, he said.
Kerala’s Finance Minister Thomas Isaac on GST compensation delay:
Edited transcript of interaction with Kerala Finance Minister Thomas Isaac:
States have informed that they’re not being compensated for the loss they are incurring due to GST’s implementation. This is the first time such a thing has happened. What is the reason for this? How big a concern is this for your state as well as for all the states and what is the way forward?
It’s true Kerala hasn’t received compensation for the last two months. That’s some Rs 1,600 crore. Our share in the central taxes have come down because of the lower tax collection and corporate giveaway. Adding to that, suppose something happens like this, you frontload borrowing.
Unfortunately, we cannot do that because borrowing has been cut by 6,500 crores. States are pushed in a kind of dire financial situation. We are on overdraft. Many states are on the brink of it. Most of them have kept out of the overdraft by just clamping down on expenditure. Now this is the strangest public finance policy to be pursued in times of recession.
Elementary economic knowledge will tell you that in a recessionary condition, you expand the public expenditure and even if you cannot expand, at least keep it constant. Maintain that level. Here, the central government is forcing all the states to cut their expenditure and this is crazy. This is a crazy policy to be pursued.
So, I don’t want to understand what’s motivating. They ask me, why do they do it? I don’t understand. Maybe there was a talk at the GST Council that the Union Finance commission chairman himself came and spoke about re-visiting the compensation package. All the states put it down. Nobody took that up. Now, I don’t know if it’s a way of putting pressure on the states. I don’t know what is motivating them but it is crazy.
Now, I don’t know if it’s a way of putting pressure on the states. I don’t know what is motivating them but it is crazy.
We’ve seen the GST revenues declining over the months and on an average, states are compensated about Rs 30,000-35,000 crore every month. If you see the compensation cess that is collected every month, it’s about Rs 9,000-10,000 crore. So, since the government is currently facing a difficulty in compensating states, now how will make up and how will it compensate states going ahead?
That is simple, so elementary. The central government can borrow money and pay the compensation. When they extend their compensation cess by another one or two years after five years time. We are not foreign countries here. We are within the federal framework. So, I don’t know what they’re saying. What’s the big deal about it? If their compensation amount is not sufficient, then borrow and pay the compensation.
Edited transcript of interaction with West Bengal Finance Minister Amit Mitra:
We have seen the Centre not releasing compensation to states, how grave a concern is this and how is this impacting?
This is a very grave concern. It emerged accidentally today that after the empowered committee meeting. Some of the ministers asked me “have you received the [GST] compensation? – “No”. Rs 1,500 crore West Bengal has not received, Rs 2,100 crore-Punjab hasn’t received. Then it emerged that all the states, irrespective of which political party is in power there (haven’t received the compensation). Union government is violating the constitutional provision. The amendment made in the parliament that for five years they (all states) will be compensated. It is a very dangerous situation.
We appealed to the Union finance minister that kindly take it into your own hands don’t leave it be in the hands of bureaucracy. Immediately give us the compensation.
It’s clear now whatever amount has been collected as compensation isn’t enough to compensate states for the losses they’re incurring. So, what is the way forward, what needs to be done, according to you?
Finance Minister has to take call on that, not me. They have many means of combating this, many means of doing this that states don’t have. They will have to decide. It’s a choice that they will have to make because of the commitment they have given. So, there is no way that I can suggest you do this or do that. You please ask Union Finance Minister, this is a fact undeniably, what will you do as soon as possible.
You’re also a member of group of ministers that has to suggest ways to augment GST revenues. What could be done now since we have seen the revenues of GST falling?
I am not member of any such GoM, but in a letter yesterday I requested the Union finance minister to kindly hold one single meeting of GST Council on two things—fraud of Rs 44,000 crore as admitted by your minister of state on floor of Parliament in a written reply to a question and second—systematic issues which are undermining the GST today.