Borrowings Should Be Used To Meet Compensation Cess Gap: Thomas Isaac

WATCH | Kerala FM Thomas Isaac on GST compensation and state finances

Delays from the central government in transferring compensation cess to states adding pressure on state finances, said Thomas Isaac, finance minister of Kerala.

Any shortfall in the compensation cess kitty needs to be met via market borrowings, as agreed upon by the GST Council in its early meetings, Isaac told BloombergQuint in an interview.

According to Isaac, the central government had a compensation cess pool of about Rs 1 lakh crore. “Of this, about Rs 65,000 crore has been paid, so they have a balance of Rs 40,000 crore,” Isaac said.

There is little communication from the central government on any likely delays in payments, which is making it difficult for states to manage finances amid an economic slowdown, he said.

On Monday, the central government released Rs 35,298 crore as GST compensation to states and union territories, the Central Board of Indirect Taxes and Customs said in a Twitter post. It did not specify which months this payment corresponds to.

Ahead of the release, states had complained about delays in receiving compensation cess. The issue is likely to be brought up at the GST Council meeting on Wednesday.

Isaac acknowledged that compensation cess collections this financial year will be lower and that the existing pool may run out by February. “This year, it looks like by February we will have exhausted the surplus; perhaps we may be in the minus, in the red,” he said.

In such a scenario, the central government must borrow to meet the needs of the states, Isaac said. The mechanism for meeting a shortfall, he said, was discussed in the early meetings of the GST Council. At the time, late Arun Jaitley, the then finance minister, said the gap between compensation cess collected and what needs to be paid out could be met through borrowings.

GST was rolled out in July 2017 after subsuming 17 different indirect taxes, including locally collected value added taxes and cesses by states. The centre is supposed to compensate states bi-monthly for any shortfall they incur in the first five years of the implementation of GST considering a 14 percent growth in subsumed indirect taxes, and keeping 2015-16 as the base year.

GST collections, according to Isaac, have been impacted by poor administration of the indirect tax regime but also a series of reductions in GST rates. “You kept cutting rates without any thought to the revenue impact and once you cut rates, it is difficult to raise them, particularly in the current economic environment,” Isaac said.