GST: States need compensation on 

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The release of Rs. 13,806 crore by the Centre to the state governments by way of GST compensation has provided some relief to the states whose finances have been badly hit by the Covid-19 pandemic. The total amount of compensation released for the year 2019-20 is Rs 1,65,302 crore whereas the amount of cess collected during the year 2019-20 was Rs 95,444 crore, the Ministry of Finance said in a press note. To release the compensation for 2019-20, the balance of cess amount collected during 2017-18 and 2018-19 was also utilised. In addition, the Centre had transferred Rs 33,412 crores from the Consolidated Fund of India to the Compensation Fund as a part of an exercise to apportion balance of Integrated Goods and Service Tax (IGST) pertaining to 2017-18. The compensation was for March 2020, and with that the Centre has paid the full compensation amount of Rs. 1.65 lakh crore that it owed the states for the last financial year. The delay in payment was due to the shortfall in GST revenue. The Centre had promised the states that it would make up for the loss of revenue the states suffered because of the introduction of GST for five years, and so they are entitled to it till 2022. The compensation was to be paid from a levy specifically imposed on luxury goods and ‘sin’ goods. The Centre had actually collected only Rs 95,444 crore by way of the levy because of the economic slowdown since at least last year. The Centre had to draw on some reserves to pay out the full Rs 1.65 lakh crore. The states have been persistently demanding the compensation. The payment of the March dues does not put an end to the demands.

The states should now get the compensation for the last four months, but the Centre is in a more difficult situation financially than it was last fiscal. It is going to get worse in the rest of the financial year because the compensation cess collections would be still lower. The reserves from which last year’s compensation was paid will no longer be available in the current year. A GST Council meeting was expected to be held in July to discuss the matter, but it has not been held.  It is important that the Centre makes good its commitment to the states without dilly-dallying. The payment was guaranteed by the Centre to the states in 2017. But the commitment seems to be weakening now. Finance Secretary AB Pandey is reported to have told the parliamentary standing committee on finance that “the GST Act has provisions to rework the formula for paying compensation to the state governments if the revenue collection drops below a certain threshold.”

This will be unfair and would amount to a breach of faith. It will also violate the spirit of cooperative federalism. It is the states which are actually fighting Covid-19. All of them are in dire financial straits and need to be supported. The Centre has many means of raising revenues, including borrowing, but the states’ resources are limited. They should not be denied their entitlements and dues.

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