GST Compensation Cess May Stretch Beyond 2024 To Clear Arrears, Borrowings

From cigarettes to luxury cars, yachts to personal planes, may continue to attract additional levies for at least another three years as the central government makes good on a promise it made to states at the time of implementation of the goods and services tax in 2017.The levy of cess in order to pay out compensation due to states under the GST agreement may have to continue for at least two years beyond 2022, according to a central government official, who spoke on the condition of anonymity. This, as the government needs to clear pending GST compensation dues to states as well as repay funds borrowed to pay out the compensation in FY21 and likely borrowings in FY22.The Finance Ministry has discussed extending the levy of cess by over two years, the person quoted above said, adding that arrears to states from FY21 and the possibility that some dues may pile up in FY22 as well, will make this extension necessary. In addition, the government will need to use the cess collections to repay the money borrowed to pay out GST compensation due to a shortfall in collections.The GST Council has already approved extending the levy of compensation cess beyond June 2022.Clearing past dues may take a year, said a second government official familiar with the matter, who also spoke on the condition of anonymity. The GST arrears are unlikely to be cleared before June 2022, this person said.Email sent to the Ministry of Finance on Friday were not answered..The GST constitutional amendment assured states of compensation for loss of revenue for five years (2017-2022), as state levies were subsumed under the common national tax. A subsequent law mandated a 14% compounded growth in states’ GST revenue every year till 2022. A cess was imposed on sin goods to fund this revenue assurance.A sharp slowdown in the economy, however, has meant a shortfall in cess collections needed to pay out GST compensation. In FY21, the central government only partially compensated states by borrowing Rs 1.1 lakh crore, when the shortfall in cess collected was estimated at Rs 2.35 lakh crore. For FY22, the government has said it will borrow Rs 1.58 lakh crore, in addition to estimated cess collection of about Rs 1.1 lakh crore. The government has projected the compensation required for the current year at Rs 2.7 lakh crore, assuming nominal GDP growth of 7% for 2021-22.States are currently claiming a high level of arrears using two different yardsticks. The first of these is computing the shortfall based on the full compensation that was due to them in FY21 based on the 14% assured revenue growth, adjusted for the funds they actually received.A number of state level officials that BloombergQuint spoke to, governed by opposition parties, indicated a high level of dues based on this computation. Most spoke on the condition of anonymity.For instance, an official in the Maharashtra government said the state is owed Rs 27,500 crore in GST dues so far. Delhi has GST arrears of around Rs 6,070 crore currently, an official in the administration said.Kerala, a consumer state that was expected to benefit from the implementation of the GST, has compensation dues of Rs 5,902 crore so far, said a state official.The central government owes Rajasthan Rs 6,870 crore in GST compensation.Dues for Punjab stand at about Rs 6,793 crore.BloombergQuint tried to reach other large states, including Bharatiya Janata Party-governed ones such as Uttar Pradesh, Bihar, Gujarat and Assam and Odisha. Officials either refused to comment or did not take calls.Others are arguing it differently. In estimates presented to the GST Council at its June 4 meeting, West Bengal Finance Minister Amit Mitra wrote that, "If we go by the actual revenue collections, more than Rs 63,000 crore of compensation is due to states for the 10-month period from April 2020 to January 2021." The exact computation for the dues claimed with Mitra is not available..While the level of dues continues to be debated between the central and state governments, the economy will eventually suffer, said economists.When the GST was implemented, it was implemented with the hope that it will increase revenue buoyancy and states will get at least 14% growth in their revenues, said Devendra Kumar Pant, chief economist at India Ratings & Research. However, in the last four years, growth has been declining and so have tax collections, he said.The shortfall in collections, and hence transfers to states, will come in the way of their ability to provide relief amid the ongoing Covid crisis, Pant said.”States need funds since the role of a government to provide support to the vulnerable sections has become more prominent at a time when we are going through the second wave of the pandemic and apprehensions of a third wave are also emerging,” he said. “So this will be difficult and states have to rely more on market borrowing to balance their budget.”Pant added that the ability of states to kick-start the economy either by increasing capital expenditure or by providing income support to vulnerable sections of the population will be limited if funds are not available. “This will make the wait for recovery longer.”M Govinda Rao, member of the 14th Finance Commission, said the GST is the most important source of tax revenue for states.At a time when states have to undergo higher expenditure due to Covid-related issues, their revenues are not rising, leading to a double whammy, Rao said. He, however, added that things could improve over the course of the year.“We are still in the first quarter and it is possible GST collections will improve as you go along. Even in May, they collected more than Rs 1 lakh crore. It is possible as the states open up, the GST revenues also improves,” he said.

GST Compensation Cess May Stretch Beyond 2024 To Clear Arrears, Borrowings

The imposition of composition cess could be extended by at least two years to pay arrears and borrowings.

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