From UPSC perspective, the following things are important :
Prelims level : GST Council, GST compensation etc.
Mains level : Paper 3- GST compensation issue
The article deal with the issue of GST compensation and analyses the various estimates of revenue shortfall given by the Centre.
- The Goods and Services Tax (GST) Council meeting has now been deferred to the first week of October due to sharp disagreement between the States and the Centre.
Background of GST
- The Centre had brought the States on board GST by promising higher revenue collection.
- States were lured by the promise of 14% annual growth in GST revenue over the base year of 2015-16.
- Any shortfall from this (for five years) was to be compensated by levying a cess on luxury and sin goods.
What are the options given by the Centre
- The transfers due since April 2020 have been withheld.
- In the last GST Council meeting held on August 27, the Centre gave the States two options.
- First, they could borrow ₹97,000 crore (the shortfall in the GST revenue compensation) from the Reserve Bank of India (RBI) under a special window at a low rate of interest.
- Second, borrow ₹2.35-lakh crore (the total compensation shortfall) from the market with the RBI facilitating it.
- The burden of repayment would be borne by the future collections from the compensation cess.
- It was proposed that this cess which was to end in June 2022 could be extended to facilitate the repayment of the debt.
Issues with the estimates
- Given the uncertainty, how accuracy of the estimates of ₹97,000 crore and ₹2.35-lakh crore offered to the States is questionable.
- When the Ministry of Finance is refusing to give a figure for growth in 2020-21, how such estimates are arrived at gains significance.
- The Union Budget presented on February 1, 2020 assumed a nominal growth of 10%.
- But optimistically, the Centre’s budgetary calculations will be off by at least 20%.
- Revenue will fall by much more than 20%.
- So, income tax collection will also be short by much more than 20%.
- The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.
- Thus, at an optimistic guess, if the economy declines by only 10%, the total tax collection will be down by about ₹12-lakh crore in 2020-21.
As many predictions are that the economy will be down by much more than 10% used in the calculations above, the revenue shortfall is likely to be far greater. This points to the dire position of the Centre (and the States) and the inevitability of a large borrowing programme. Only the Centre is in a position to do such massive borrowing.
Back2Basics: Two options for the GST compensation
- Option 1 has a special window for states, coordinated by the Finance Ministry, to borrow the projected shortfall of Rs 97,000 crore only on account of GST implementation — and not the Covid-19 pandemic.
- This amount can be fully repaid from the compensation cess fund, without being counted as states’ debt.
- Option 2 takes into account the impact of the pandemic, proposing states to borrow the entire Rs 2.35 lakh crore and bearing the interest burden though principal will be repaid from the cess proceeds.
- The GST shortfall amount (Rs 97,000 crore) will not be counted as states’ debt, while the rest of the amount of Rs 1.38 lakh crore will be counted in the books of the states.