Updated: August 29, 2020 9:12:20 am
Union Finance Minister Nirmala Sitharaman on Thursday referred to the Covid-19 outbreak as an “act of God” that would result in a contraction of the economy in the current fiscal.
With the center-state friction over outstanding compensation payments under the goods and services tax (GST) taking a new twist at the 41st GST Council meeting on Thursday, the strain on state finances is likely continue in the short term. Several states have opposed the two options for borrowing which were proposed at the meeting as a way to overcome the revenue shortfall.
GST compensation payments to states have been pending since April, with the amount outstanding for April-July estimated at Rs 1.5 lakh crore. The GST compensation requirement is estimated at around Rs 3 lakh crore this year, while tax collection is expected to be around Rs 65,000 crore, an estimated compensation deficit of Rs 2.35 lakh crore.
What was discussed at the meeting?
The legal opinion on indebtedness was discussed. The opinion of the Indian Attorney General was cited to support the argument that GST compensation should be paid during the transition period from July 2017 to June 2022, but the compensation gap cannot be bridged using the Consolidated Fund of India. The Attorney General has suggested that the compensation rate can be extended beyond five years to cover the deficit, said Finance Secretary Ajay Bhushan Pandey.
State finance ministers, but a few, including those from Assam and Goa, lobbied for the Center to borrow to close the income gap. Towards the end of the meeting, the Center offered two options.
The first was a special window for states, in consultation with the RBI, to borrow the projected GST deficit of Rs 97,000 crore, and an amount that can be repaid after five years of GST, until June 2022, from the fund. of compensation. A 0.5% relaxation in the debt ceiling would be provided under the Fiscal Responsibility and Budget Management Act (FRBM), unrelated to the conditions previously announced as part of the pandemic package linked to the implementation of reform measures such as the universalization of ‘One Nation One Card of rationing, ease of doing business, energy distribution and increased income for local urban agencies.
The second option was to borrow the entire projected deficit of Rs 2.35 lakh crore, both due to the lack of GST collection and the expected deficit due to the pandemic, facilitated by the RBI. So far, no FRBM relaxation has been mentioned for this option.
Read also | The government blames Covid, but the payment stalled a year ago
What are the opinions of the states on these?
Five states and territories of the Union (Kerala, Punjab, West Bengal, Puducherry and Delhi) have expressed concern about the proposals.
KERALA: Finance Minister Thomas Isaac said imposing a compensation cut and making a distinction between GST and Covid-related loss of income is unconstitutional. It has said that the states’ FRBM cap must be increased by at least 1.5 percentage points if the entire Rs 2.35 lakh crore is to be borrowed.
PUNJAB: Finance Minister Manpreet Singh Badal has said that these options were imposed on the states and that the loans would translate into “mortgaging the future to live in the present.”
DELHI: MP CM Manish Sisodia has called the Center’s refusal to pay the states the “biggest betrayal” in the history of federalism in India, and has expressed concern about Delhi’s inability to borrow through the RBI. to close the compensation gap, given his UT status with the state legislature.
WEST OF BENGAL: Finance Minister Amit Mitra said that the indebtedness of the states will increase their responsibility for debt service, and any other interpretation of Section 18 of the Constitution Act (Hundred and First Amendment) related to compensation it is unjustifiable. Section 18 of the amendment says that Parliament, on the recommendation of the GST Council, will provide compensation to states for loss of revenue arising from the implementation of the GST for five years.
States have asked the Center for details on the two options. They will then have seven business days to restate their views.
What is the importance of GST for the states?
States no longer have tax rights after most taxes, except for oil, alcohol, and stamp duty, were included in GST. GST accounts for almost 42% of the states ‘own tax revenue, and tax revenue represents about 60% of the states’ total revenue.
The finances of more than a dozen states are under heavy pressure, resulting in wage delays and sharp cuts in capital expenditures amid pandemic-induced lockdowns and the need to spend on care. medical.
The Finance Secretary said that GST collections had been badly affected by the pandemic. Revenues are expected to suffer further; The economy is expected to recession this year. Union Finance Minister Nirmala Sitharaman on Thursday referred to the Covid-19 outbreak as an “act of God” that would result in a contraction of the economy in the current fiscal.
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When did the issue of compensation to the states arise and how did it evolve?
The deficit problems emerged almost a year ago when overdue payments were delayed for August-September 2019. Since then, all subsequent payments have experienced cascading delays.
The economic slowdown, which has been going on for almost three years, began to affect GST revenue collection in August 2019.The Center first admitted the problems with compensation payment at the 37th GST Council meeting in Goa last September; He said the amount of cess available in the compensation fund at the end of February “will not be able to pay compensation for lost income until the bi-monthly period from December to January.”
On November 27, 2019, the GST Council wrote to states that the GST and the collection of offsetting taxes in the previous months had become a “cause for concern”, and that it was “unlikely that the requirements would be met. compensation requirements “.
GST compensation payments had started to lag by then. Many state FMs had begun to express concerns about having to repeatedly ask for their share of the income. The GST compensation payment of Rs 35.298 crore for August-September 2019, due in October, was paid in December. The Center released a further 34,053 crore rupees in two installments in February 2020 and April 2020 as compensation for October-November 2019.
In June this year, Rs 36,400 crore was released as GST compensation for December-February, and the March 13,806 crore balance was released in July, bringing the total compensation payment for fiscal year 20 to 1.65 crore. rupees.
Under the GST (Compensation to States) Act 2017, states are guaranteed compensation for loss of revenue due to the implementation of GST during a transition period of five years (2017-22). Compensation is calculated based on the difference between current state GST revenue and protected revenue after estimating a 14% annualized growth rate from the 2015-16 base year.
The high rate of 14%, which has worsened since 2015-16, has been seen as disconnected from economic reality. In chairing the first meetings of the GST Council, then-Finance Minister Arun Jaitley had proposed a revenue growth rate of 10.6% (the average growth rate for the whole of India in the three years prior to 2015 -16). Board meeting records show that the suggestion of 14% revenue growth was accepted “in a spirit of compromise.”
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