Slowing Consumption Doubled Centre’s GST Compensation Payout In April-July

Slowing Goods and Services Tax revenue collection has substantially increased the compensation the central government pays to states for revenue loss on account of the nation-wide implementation of the indirect tax. In April-July 2019, the Centre paid states Rs 45,745 crore in compensation—that’s a 143 percent jump over the Rs 18,829 crore paid in the same period last year, according to a report issued by the Parliamentary Standing Committee on Finance.

When GST was introduced in 2017, the Centre, through the constitutional amendment and GST (Compensation to States) Act, 2017, promised states it will compensate them on account of revenue loss due to implementation of GST for a period of five years. The compensation is to bridge the gap between actual state indirect tax collection via state GST and integrated GST and an assured 14 percent annual increase over 2015-16 indirect tax revenue of the state. The compensation is disbursed bi-monthly from funds the Centre collects via levy of a compensation cess on sin goods.

The total GST compensation to states was Rs 17,789 crore in April-May 2019, and Rs 27,956 crore in June-July 2019, showing a year-on-year increase of 356 percent and 87 percent, respectively. This makes it clear that due to lower overall GST collections, the states’ GST revenue through state GST and integrated GST is also low and hence the compensation much higher than in the previous year.

While the compensation to be paid for August-September and October-November isn’t disclosed in the report yet, given that GST revenue collection has been muted and the states are owed 14 percent more revenue over previous year, the compensation for this period, too, is likely to be higher than last year’s Rs 27,615 crore in August-November 2018.

How Will The Government Fund Compensation?

In the July presentation of the union budget for FY20, the re-elected Modi government reduced its GST revenue target on account of slowing economic growth but still pegged the increase at 13.5 percent. Compensation cess collection has been targeted at Rs 1,09,343 crore versus last year’s Rs 90,000 crore.

So far, the GST revenue has lagged estimates all year, with a 3.7 percent increase over the previous year. As on October, the total compensation cess collected by the government was Rs 55,467 crore against Rs 54,662 collected in the same period last year—that’s virtually no increase against the estimated 22 percent rise projected in the budget. Of that, Rs 45,745 has been paid as compensation for April– July, leaving the Centre with just Rs 9,722 crore for August–September compensation.

The pending compensation for those two months has prompted states to request Finance Minister Nirmala Sitharaman to disburse the amount at the earliest. The bi-monthly disbursal of compensation to states for August-Septembr has been approved, and will be released shortly, a government official told BloombergQuint requesting not to be named.

The Centre had also sought suggestions from states to augment GST revenue as compensation to states has increased “significantly” and is unlikely to be met through compensation cess collections.

On Thursday, Sitharaman told lawmakers that compensation cess collected in April-Oct period was Rs 55,467 crore, and the compensation released to states was Rs 65,250 crore. That, she said, was Rs 9,783 crore higher than the cess collected. The government, therefore, would have to make up for this additional amount through other sources, she said.