GST compensation Standoff

Source- The Hindu

Syllabus- GS 3- Government Budgeting

Context- Differences of opinion have emerged between Centre and states at the 41^st Goods and Service Tax [GST] Council meeting over compensation deficit.

• GST- Goods and Services Tax, is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. GST is a single domestic indirect tax law for the entire country.

GST [Compensation to States] Act, 2017

• States are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22).
• The compensation assures an annualized 14% growth rate from the base year of 2015-16.
• States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty, were subsumed under GST.

Distinction in shortfall

1. 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.
2. 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.

Options made by the Centre

Option 1 –

• Special borrowing window – To provide a special borrowing window to states, in consultation with the RBI, which has to be repaid by the states after 5 years.
• A 0.5 percent relaxation in the borrowing limit under the Fiscal Responsibility and Budget Management [FRBM] Act would be provided.

Option 2–

• Meeting the GST compensation gap of this year.
• No Fiscal Responsibility and Budget Management Act relaxation has been mentioned for this option.

Challenges for central government

1. Options rejected– Several States have rejected both options. Some states like Tamil Nadu, have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.
2. Compensation cess levied on demerit goods will stay on beyond 2022. This may hurt few sectors such as auto sector.

Way forward

Centre need to resolve this impasse in a way that future GST reforms do not fall victim to the trust deficit engendered by this standoff, the pandemic response is strengthened and all-round government capital spending to bolster sagging demand not derailed.