Understanding the Most Recent Developments in GST Compensation: Insights and Updates
According to recent reports, the Central government may shortly disburse approximately 30 billion as GST (Goods and Services Tax) compensation for June 2022, marking the final month of the Union government’s stipulated five-year compensation period. This compensation is crucial for stabilizing state revenues, especially as states struggle to recover from the economic impacts of the pandemic.
Compensation Disbursement Details
The sources indicate that due to the insufficient cash reserves in the designated cess pool, the Center is likely to release the compensation amount from its own revenue stream. This action is taken to ensure that capital spending by states, which often reduce revenue-generating expenses such as interest payments and salaries, does not stall due to lack of funding.
An additional concern is that the Center will release some arrears against claims related to earlier financial years, provided that states produce reconciled statistics approved by their auditor generals. The sum may be released before the upcoming GST Council meeting, although no formal decision has been made yet on the exact date.
Historical Compensation and Future Prospects
For the first five years of GST, from June 2017 to June 2022, the GST Compensation to States Act provided for the release of compensation against an annual increase of 14% above revenues from the taxes subsumed. However, the Center is now considering discontinuing the compensation to states after the transitional period ends, as it was originally intended to cover states' revenue shortfalls during this phase.
The Impact of GST on State Revenues
State governments continue to face challenges in collecting the compensation cess, a critical issue. Previously, states that produced or exported goods levied a central sales tax (CST) of up to 2% on interstate transactions. After the introduction of GST, the share of CST in state revenue dropped significantly, from 4.16% in FY17 to 0.95% in 2020-21 (Revised Estimate) as per a report by India Ratings.
During FY18-FY21, state GST made up 55.4% of their total tax collection, down from 55.2% during FY14-FY17. This research indicates that the implementation of GST did not provide additional advantages to states' tax collections. Moreover, between FY18 and FY21, SGST (State Goods and Services Tax) experienced an average growth rate of 6.7%, significantly lower than the 9.8% increase in GST-related levies between FY14 and FY17.
The GST Transition and Revenue Guarantees
Initially, the states' revenue that was absorbed by the GST was safeguarded for a five-year transition period (2017-18 to 2021-22) under the presumption of constant revenue base growth at 14% annually. Any shortfall was to be covered by an additional tax compensation cess on luxurious or opulent items.
Despite the Centre’s compensation cess collections being sufficient in 2017–18 and 2018–19, a shortfall in cess collection in 2019–20 was due to a slowdown in the economy. The Reserve Bank of India suggests that this shortfall will grow even more in 2020–2021, exacerbated by the devastating impact of the COVID-19 pandemic on public budgets.
Future Prospects and Recommendations
The future of GST compensation remains uncertain. With ongoing economic challenges and the need for ensuring state stability, it is crucial for the Centre to find sustainable solutions. These could include a combination of continued cess collection, adjusted revenue guarantees, and targeted fiscal measures to support state finances.
It is imperative for policymakers to continuously monitor the economic impact and adjust policies accordingly. State governments should also explore alternative revenue sources and efficiency improvements to ensure long-term fiscal sustainability.
Conclusion
The recent developments in GST compensation highlight the complex interplay between national and state finances. As India navigates post-pandemic economic challenges, the need for effective fiscal management and sustainable policies becomes more critical. Understanding these developments is essential for all stakeholders involved in the GST ecosystem.