What’s the issue? The Central Government hasn’t paid the states their share of GST revenues. Apparently, the Union Finance secretory told the Parliamentary panel on finance ministry that “the central government is in no position to pay the share of the states”
Though, the Government cleared the pending dues (of Rs 13,806 crore) for 2019-20 to the states this month, the payments for this year since April has not been released yet.
Before we proceed, we have to understand why the Centre has to pay GST share to the states.
The GST was rolled out in India on 1st July 2017. [I highly recommend you to this post to grasp the concept behind GST- The GST Explained]
The states were initially reluctant to accept the proposal for GST because of the following concerns-
- Fear of loss of revenues: GST on inter-state sales follows the destination principle that is it would be applied in the state where the product is sold. It would lead to revenue loss to the states where the goods originate. Example: If a manufacturer in Assam sells his goods to a retailer in Haryana, the share of GST accruing to the state will be collected by Haryana, and not Assam. Therefore, manufacturing states did not want GST to be implemented for fear of loss of revenues. Even Narendra Modi was vehemently against the GST when he was the CM of Gujarat.
- Fear of loss of fiscal autonomy: Before GST was implemented, only state Governments could levy taxes on the sales of goods. Therefore the 101st constitutional amendment Act was passed in the Parliament to enable central and states to levy all kinds of taxes. This is because the GST was envisaged to subsume all indirect taxes in the country levied by both state and the center.
To allay the above concerns, the center agreed to compensate the states for the first 5 years (from the introduction of GST til 2022) for any revenue loss. The revenue loss/ shortfall is calculated assuming a 14% annual growth in GST collections by states over the base year of 2015-16.
There is an additional levy (cess) (over and above the GST rate) on five products categorized as sin and luxury goods namely tobacco, pan masala, aerated drink products, coal, and motor vehicles. This cess flows into the compensation fund made for the purpose of making good any revenues shortfall to the states.
[You may also read: The final structure of Goods and Services Tax]
Why is the Centre unable to pay? This is because the Government is not getting adequate GST revenues because of the slowdown in the economy. This became an issue after GST revenues started declining since August 2019. GST collections fell sharply to a 19-month low of Rs 91,916 crore in September 2019.
[You may also read: Why is the Indian Economy in slowdown?]
The Centre has released over Rs 1.65 trillion as GST compensation for 2019-20. However, the amount of cess collected during the year 2019-20 was only Rs 95,444 crore. This implies that the payment was 70 % higher than the collection.
[To make up for the gap, the Government utilised the excess cess amount in the compensation fund collected in 2017-18 and 2018-19. It also transferred back Rs.33412 crore from the Consolidated Fund of India to the compensation fund as a part of an exercise to apportion balance of IGST pertaining to 2017-18.]
Then the virus struck and worsened the situation. In the April-June quarter of 2020, the GST collections recorded a 41% decline.
Therefore, it has become difficult for the center to pay to the states.
[You may also read: Why were the states in a rush to open liquor shops?]
It is not yet clear if the Centre can get out of GST payments on account of the pandemic. The assumed growth of 14 % growth in GST revenues was far too optimistic.
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