Source- The Hindu
Syllabus- GS 3- Government Budgeting.
Context- The onus would be on Centre to resolve this impasse with regard to compensation cess of GST reforms.
What is GST compensation?
- The Centre is obliged to pay to the States, for a period of five years, compensation for revenue shortfalls in return for their having ceded the power to levy the multiple taxes that were subsumed into the GST.
- The compensation is calculated based on the difference between the states current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.
What is current GST compensation situation?
- Pending payment– GST compensation payments to states have been pending since April, with the pending amount for April-July estimated at Rs 1.5 lakh crore.
- GST revenue gap– The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore – an estimated compensation shortfall of Rs 2.35 lakh crore.
What were the Options given by the Center to the States?
Options made by the Centre-
Option 1 –
- To provide a special borrowing window to states, in consultation with the RBI, to provide Rs 97,000 crore at a “reasonable” interest rate and this money can then be repaid after 5 years by extending cess collection.
- A 0.5 percent relaxation in the borrowing limit under the Fiscal Responsibility and Budget Management [FRBM] Act would be provided.
- To meet the entire GST compensation gap of Rs 2.35 lakh crore this year itself after consulting with the RBI.
- No Fiscal Responsibility and Budget Management Act relaxation has been mentioned for this option.
Issues raised by the States-
- Several Sates have rejected both options and some, including Tamil Nadu- have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.
- Enforcing a cut in compensation and bringing in a distinction between GST and Covid-related revenue loss is unconstitutional.
- The two options offered to the States would impose huge debts on the states and as a result many would not even be able to pay salaries.
- States simply do not have the headroom to borrow money to make up for the GST shortfall as every single State has reached its FRBM [Fiscal Responsibility and Budget Management] limit.
What are the expected reasons for Revenue shortfall for the fiscal year 2020-21?
- Corporate tax collection loss – Companies in sectors such as airlines, hotels and consumer durables will show losses and therefore, pay less tax.
- Less income tax collection– Large numbers of workers have lost employment and/or have faced salary cuts. Many private firms are also likely to incur losses. So, income tax collection will also be short by much more than 20%.
- Less import – The Integrated Goods and Services Tax (IGST) and customs duties will also decline with fall in import.
- The production of luxury and sin goods has been severely impactedand they pay the high rate of tax — 18%, 28% and cess on top.
- The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.
Center needs to renege on its promise to find ways to compensate the state for loss of revenue. Only the Centre is in a position to do such massive borrowing as Reserve Bank has itself said that for the Central government to borrow would be both easier and simpler. Central government would pay 2% less interest than the states.