The Covid-19 has devastated the economy. GDP has contracted by 23.9 per cent in the April- June quarter and GST collection has dropped by 41 per cent. Relaxation of lockdown has improved economic activities, still the overall decline till August stands at 30.4 per cent. Odisha’s collections during five months, up to August, declines by 24 per cent.
The States have to spend more to meet the Covid situation and for revival of economy; and on the other hand, its resources have depleted. The taxes subsumed in GST contribute more than fifty percent of a State’s revenue. Since GST collection has fallen, so also the cess collected for compensation has plummeted. The revenue gap is increasing.
Compensation is determined by compound growth rate of 14 per cent of a State’s 2015-16 collection and deduction of the actual GST collected in the year from the projected revenue so arrived.
The States demand the Centre pay the compensation and the Centre, as stated by Finance Secretary before the Joint Parliamentary Committee on Finance, is not in a position to compensate to the States. The Centre’s revenue collection, no doubt, has also suffered. All the States have compensation claim of Rs.1.51 lakh crore.
In Odisha GST collection for April- July has registered a negative growth of 24.91 percent. In the month of August, the State’s GST collection has dropped by 6 per cent.
During this period, collection of taxes from the non-GST goods like petrol, diesel and liquor is also more discouraging, that has fallen by 34.63 per cent compared to last year’s collection. Odisha had claimed compensation of Rs 3,647 crore for April-July, pending with the Centre. Odisha like any other States is in dire need for additional resources.
The forty-first GST Council met to discuss only the compensation issue. The Union Finance Minister proposed two options before the States. First, the States can borrow Rs 97,000 crore, the loss they suffered for GST implementation. The loan can be paid by the compensation cess. The States need not pay back from any of its other resources. Second, the States can also borrow Rs 2,35,000 crore, the loss incurred due to both Covid and GST implementation. In this case, the principal shall be paid by the compensation cess and the States have to pay the interest. The States are advised to borrow on both the options.
Cess is collected on luxury cars, aerated drinks, pan masala, tobacco products and coal, which go to the compensation fund, and from the fund the losing States are compensated.
The basis on which the Finance Ministry has determined the loss does not seem rational. The Ministry has applied 10 per cent growth rate to the actual GST collection of FY2019-20 to arrive at a loss of Rs 1,65,000 crore, and estimated compensation cess of Rs 68,700 crore for FY 2020-21. So the loss to be compensated to the States is Rs 97,000 crore. This, the Ministry says, is loss for GST implementation only. But economic slowdown had set in much before the Covid, the GST collection for FY 2019-20 was only 8 percent.
For the quarter ending December, 2019, the growth rate was 3.07 per cent and for the quarter ending March, 2020, it was 2.47 percent. In the month of March, the collection dropped by 4 percent.
Odisha’s collection for the year 2019-20 registered a growth rate of 10 percent, but in the month of March, the collection has fallen by 7.37 percent. So, applying a growth rate of 10 per cent when the collection is declining is arbitrary. Some States have sought for a written reply questioning the basis for the calculation.In the second option, the Ministry has determined the loss for the entire 2020-21 to be Rs 3 lakh crore and compensation cess would be approximately Rs 65,000 crore. The balance Rs 2,35,000 crore loss is on account of Covid (approximately Rs 1,38,000 crore) and GST implementation (Rs 97,000 crore).
It’s the moral responsibility of the Centre to compensate the States for the loss in GST collection without demarcating loss for GST and loss for Covid.
Section 10 of the GST Compensation to States Act provides, if any amount of the compensation cess remained unutilised after five years, one half will go to the Centre and the other shall be distributed among the States.
No provision is there in the Act, if there is shortfall in compensation cess how to meet the State’s demand, perhaps, for the reason that a Covid-like situation was never foreseen.The Centre has always initiated reforms in the indirect taxes which are in the States’ domain and has compensated to the States for the loss.
The Centre had compensated for loss on account of implementation of VAT from 2005-6 to 2007-08 although it did not have any share in it. Similarly, the Centre also compensated the States for reduction of CST, the tax collected and appropriated by the States, from 2007-08 to 2012-13.
The States agreed to implement GST and surrender their rights of taxation over 50 per cent of their revenue on the assurance that, in case of shortfall, the Centre would compensate. As pointed out earlier, the decline in GST collection started before Covid, and the Centre had a problem in compensation from August 2019. The Covid aggravated the conditions.It is learnt that 15 States including Kerala, West Bengal, Punjab, Tamil Nadu demand that the Centre borrow and compensate to the States. The States directly handle the Covid situation and also have more proximity to the people regarding welfare measures.
The States have certain limitations: it cannot borrow above 3 per cent of its income. The Centre now wants to relax and increase to 3.5 percent, but it’s not enough. So the argument is the Centre should borrow and compensate to the States.
The loan can be repaid by the compensation cess, neither from Centre’s, nor from States’ exchequer. For this purpose, the period of cess collection can be extended beyond five years.
(The writer is a former Additional Commissioner, GST, Odisha. Views expressed are his own)