Status of GST Compensation Arrears

the story So Far: In a meeting with chief ministers last week, Prime Minister Narendra Modi said that several non-BJP ruled states have failed to cut taxes on fuel products whose prices have risen sharply since March in the interest of providing relief from them. urged to do People facing high inflation. West Bengal, Tamil Nadu, Maharashtra, Kerala, Telangana, Jharkhand and Andhra Pradesh—most of the states he mentioned gave a befitting reply to the PM’s pitch. West Bengal and Tamil Nadu said they have already reduced their VAT levy once. Maharashtra and Kerala pointed to the resource crunch of the states and dues from the Centre. The Mamata Banerjee administration said reduction in state duty on petrol and diesel would be possible only if the Center clears its dues of over Rs 97,000 crore, including compensation for implementing the Goods and Services Tax (GST).

What is the status of GST compensation outstanding to the states?

The GST regime included the abolition of several state and central charges to create a simpler tax system for businesses. This meant that states had to give up many taxation powers in the process, with assurances that the revenue loss would be compensated for five years. Compensation was to be calculated by remitting a 14% year-on-year increase on revenue in 2015-16 from state taxes subsumed in GST, and from the Compensation Cess Fund backed by a cess on sins and luxury goods such as pan masala. , tobacco, coal and cars.

Hours after the meeting, to counter the arguments of these states about pending arrears, the finance ministry said that the GST compensation arrears outstanding to states for 2021-22 was Rs 78,704 crore, which is four months after such accrual. Is equal to. This means that the arrears have been remitted to the states for a period of eight months from April 2021 to November 2021. The ministry, which last released GST compensation of ₹18,252 crore to states and union territories during March, indicated its inability to clear the dues. Immediately on account of ‘inadequate balance’ in the Compensation Cess Collection Fund. “Normally, compensation for 10 months from April-January of any financial year is released during that year and February-March compensation is released only in the next financial year. The pending amount will also be released on deposit of the cess amount in the Compensation Fund,” the ministry assured.

On top of the ₹ 78,704 crore payable to states, apparently for the period December 2021 to March 2022, compensation for the period April to June – the last quarter for which such arrears would be due – also needs to be arranged. Aditi Nair, chief economist at rating agency ICRA, has estimated that it could be another ₹60,000 crore, with the total dues that are yet to be paid to the states at close to ₹1.4 lakh crore.

How much GST compensation has been paid to the states so far and when will this cess end?

Since July 2017 when the GST regime began, around Rs 7.35 lakh crore has been released to the states as GST compensation. This nearly doubled from ₹83,000 crore in 2018-19 to ₹1.65 lakh crore in 2019-20, before the pandemic hit the economy and revenue collection across the board. The Finance Ministry said that compensation of Rs 2.78 lakh crore has been released to the states for the year 2020-21 itself. Because the inflow of GST as well as compensation cess had dried up due to the COVID-19 lockdown, ₹1.1 lakh crore was financed through special borrowings from the market. In fact, the Center borrowed these funds and staggered them during the year in the form of ‘back-to-back’ loans to the states. Similarly, ₹1.59 lakh crore was raised in 2021-22 to pay the compensation arrears of the states in line with the projected shortfall in cess fund collections, and these funds were diverted during the financial year by resorting to front-loading of borrowings in October. was fully distributed. At the time, the finance ministry had expected the total compensation payment for the year to be ₹2.59 lakh crore, which it said would be higher than the amount of compensation that states would receive in 2021-22, indicating that it would have to pay for 2020-21. pending compensation. ,

The levy of compensation cess, which was to expire on June 30 this year, has been extended till March 2025-26 for the purpose of using the proceeds to repay principal and interest on these special loans. Concerned over the depleting sources of income after the assured compensation stopped getting from July 1, several states have urged the Center to extend the GST compensation period beyond the promised five years. But these demands have been put on hold so far, and are unlikely to gain traction, citing the legal provisions that enable GST.

Will record GST collections in recent months help?

Certainly the states get a major chunk of the higher GST collections. With both April and May accounting for ₹1.42 lakh crore and over ₹1.67 lakh crore in GST revenue, the Centre’s and states’ share, after making adjustments, was a whopping ₹1.32 lakh crore and ₹1.36 lakh crore, respectively. period of two months. However, the GST Compensation Cess collection is still not growing as fast as the overall kitty. Giving states some clarity about when the GST compensation arrears will be released will help them plan their borrowings for the year, which will be particularly difficult from July. While the expected move in GST compensation flow from July 2023 could boost the state’s borrowings this year, the timing of pending funds release will significantly impact their plans, Ms Nair said.

Moreover, with states expected to aggressively pursue capital expenditure this year, which is crucial to boost growth, early release of funds, whether it is transfer of other tax collections, or GST compensation, they should be made public. The infrastructure will help in planning and executing projects quickly.