In a move that would partly address the goods and services tax (GST) revenue deficit for the Centre and come in aid of states worried over stagnant growth in their own tax (non-GST) revenue, the Lok Sabha on Thursday approved changes to the relevant law to allow both to dip into the surplus in the GST Compensation Fund at any time during a financial year. The law has hitherto allowed division of the surplus only after a five-year “transition period” (till June 2022), during which states are constitutionally guaranteed a GST revenue growth (over the base year, 2015-16) of 14% per year, meaning any shortfall from the threshold will be compensated from the fund.
To obtain the proceeds of the compensation, a cess is levied on some demerit/sin goods along with luxury items, over and above the GST rates. The surplus that accrued to the fund since the July 2017 launch of GST is around Rs 34,250 crore. With the amendment to the GST — Compensation to States Act, this amount can now be divided between the Centre and states on a 50:50 basis. The horizontal distribution of the states’ share would be in line with their relevant base-year revenues.
The Centre is witnessing a shortfall of 20% (~Rs 10,000 crore per month) against its budget target for central GST. Some Rs 17,000 crore to flows from the compensation fund to the Consolidated Fund of India will help its fiscal consolidation effort. “Ad hoc disbursal of compensation cess to the Centre and states indicates an excess collection of cess beyond the losses contemplated by states. This calls for a justification, validation and then rationalisation of cess as its levy was only to compensate the states for losses arising out of GST implementation,” said Rajat Mohan, partner at AMRG & Associates.
“Ongoing allocations to the states and the Centre would enable deficit states to be compensated on a timely basis and strengthen the spirit of cooperative federalism which the Centre and states have displayed in the entire GST reform process,” said MS Mani, partner, Deloitte India.
Since February, the GST Council has provisionally settled Rs 85,000 crore of floating integrated GST in two tranches between Centre and states, which has brought down the pressure on compensation fund. The aggregated monthly state GST collection for avoiding compensation shot up to over Rs 49,000 crore in FY19 from Rs 43,000 crore in the last fiscal.