The central government’s payout to states as compensation towards goods and services tax for the year ended March more than doubled over the last year as a result of slowing economic activity.
The compensation to states was Rs 1,65,302 crore, the Ministry of Finance said in a statement, adding the GST compensation cess, collected by the Centre, stood at Rs 95,444 crore. In 2018-19, the GST cess collected and compensation released to states were Rs 95,081 crore and Rs 69,275 crore, respectively.
The virus outbreak and the world’s most stringent lockdown lasting over more than two months aggravated an already-slowing economy by obliterating consumption—which nearly contributes 60% to the economy. As a result, India’s economy is widely expected to witness its first contraction in nearly four decades.
The central government compensates states bi-monthly as they lost powers to levy taxes such as value added tax with the rollout of GST. The compensation is guaranteed for five years, and is calculated at a growth rate of 14% keeping 2015-16 as the base year. With declining GST collections last year following a demand-led slowdown, the government had stopped releasing compensation bi-monthly due to inadequate collections from GST compensation cess that’s levied on sin or demerit goods.
Since the cess collected was about Rs 70,000 crore less than the requirement to compensate states, the amount collected as excess in 2017-18 and 2018-19 of about Rs 47,271 crore was used for the same. Besides, Rs 33,412 crore—that was transferred to Consolidated Fund of India—as balance IGST in 2017-18, was also utilised to compensate states, the statement said.
The amount of compensation to be given to the states is going to increase substantially this year, Rajat Bose, a partner at Shardul Amarchand Mangaldas & Co., said. That, he said, would be on account of muted GST collections as the Covid-19 pandemic has impacted consumption.
The government may have to resort to market borrowing to fulfill its commitment towards compensating states for losses due to GST, Bose told BloombergQuint.
The government is exploring various options to adequately compensate states that involve raising money from the markets with a guarantee from the central government or by extending compensation levy beyond five years and continuing to compensate states with the collections.
No Compensation For Five States
Maharashtra received the highest compensation of Rs 19,233 crore in 2019-20 followed by Karnataka that got Rs 18,628 crore, the statement said. Meghalaya received the lowest compensation of Rs 157 crore. States such as Manipur, Mizoram, Sikkim, Nagaland and Arunachal Pradesh reported surplus collection and didn’t need compensation from the Centre.
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