The central government still owes about Rs 30,000-34,000 crore to states as Goods and Services Tax compensation for December 2019 and January 2020, even as state governments find themselves at the forefront of the fight against the coronavirus and struggle with their finances.
The compensation for December-January had to be paid by second week of February, but has been delayed due to inadequate money in the compensation cess fund as a result of the economic slowdown, said a government official, on the condition of anonymity.
The December-January payout will happen in phases and the central government is coordinating with states and asking them to be patient for the compensation payout, said the same government official.
The cess fund is the corpus gathered from the levies put on sin and demerit goods. As the introduction of GST in 2017 prevented states from levying indirect taxes on most goods and services, the central government had promised to compensate states by paying them the lost revenue, for five years starting 2017-18. This compensation is given bi-monthly assuming a 14 percent increase in their revenue keeping 2015-16 as the base year.
On Tuesday, the government released Rs 14,103 crore to states as the second tranche of compensation for October-November. The government had paid Rs 19,950 crore to states in Feb for Oct-Nov too taking the total for the month to Rs 34,013 crore.
Another disbursement of nearly the same amount will have to be paid to the states for February and March, which is due in April, and booked in FY21 accounts.
‘Help States More’
Punjab is owed about Rs 4,000 crore for December to March, and the state’s Finance Minister Manpreet Singh Badal said this should be released at the earliest. With the countrywide lockdown, the GST collections are expected to dip substantially, leading to more trouble for the states, Badal told BloombergQuint. The GST compensation is states’ right, and the centre should step in to help the states, he said.
Other states have also made similar requests.
D Jayakumar, Tamil Nadu’s Minister for Fisheries and Personnel and Administrative Reforms, and the state’s representative to GST Council said the centre needs to clear GST dues as early as possible so that the funds can be utilised to provide relief to people. Jayakumar said the centre also owed Tamil Nadu around Rs 2,400 crore as its IGST share for FY19 and FY20. A group of ministers had been constituted by the GST Council to look into the issue.
Chhattisgarh’s Minister for Commercial Tax TS Singh Deo told BloombergQuint that his state is owed Rs 1,551 crore by the centre for December-March, money that states now needed to use for coronavirus-related relief measures. Derek O’ Brien, a Member of Parliament representing the ruling All India Trinamool Congress party in West Bengal, tweeted that the state is owed Rs 2,393 crore in GST compensation from December 2019 to March 2020. Devolution of central taxes to West Bengal worth Rs 11,230 crore is also due, he tweeted.
Separately, many states have also requested the centre to increase their borrowing limit from the current cap of 3 percent of the GDP.
Just raising the limit will not entirely help states as the borrowing costs are high, Badal added. States’ borrowing costs spiked on Tuesday, the first bond auction of the current financial year. The highest borrowing rate of 8.96 percent was paid by Kerala which raised Rs 1,930 crore for a 15-year duration.
Due to the 21 day countrywide lockdown, states also will bear a significant hit on taxes that otherwise be collected from sale of alcohol and fuel. “I understand the situation of the centre, but we’re at war, and these call for unusual measures,” Badal said.
Lacking funds in the compensation pool to direct to states, the centre is looking at various ways through which it can release money in a timely manner. Due to the economic slowdown with the spread of the coronavirus, the option of raising the compensation cess on sin and demerit goods will have to be carefully thought through, the official quoted above said.
Rs 1.34 lakh crore had been paid out to states as of November, even as the compensation cess collections lagged, at Rs 96,127 crore. Excess cess collected in FY18 and FY19 of about Rs 47,271 crore has also been used to compensate states.
At the conclusion of the last GST Council meeting in March, Finance Minsiter Nirmala Sitharaman had said there was a discussion to borrow from the market to adequately compensate states for any losses they incurred.
The government official said a clear picture would emerge after April 25, once GST collections for March 2020 are known.
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