GST shortfall: Centre’s formula signals states to take hit from Covid

Business & Economics

The revenue shortfall caused merely by GST implementation will only be bridged without a cost to the states.

The Centre’s message to states as it presented two options before them at the Thursday’s GST Council meeting was very clear: the additional revenue slippage on account of Covid-19, an event that was not foreseen once the states were offered a guaranteed revenue level under GST, could be addressed only with a cost to them.

The revenue shortfall caused merely by GST implementation will only be bridged without a cost to the states.

The first option, clearly the one which the Centre prefers, will mean that a near-no-cost special loan facility will be arranged by the Centre, using its persuasive powers with the RBI and state-owned banks, to fill the gap in the compensation fund insofar as required to plug the deficit caused by GST.

The second option, which involves addressing the entire revenue shortfall in FY21, will mean the states will have to bear the interest cost.

Not for nothing some states like Kerala oppose the formula — the compensation funds, after all, were supposed to be part of their income, sans any cost.
It is another matter that the Centre was unduly liberal when it assured the states 14% annual GST growth for the first five years.

According to a detailed note sent to states by the Centre — FE has reviewed the note — in the Rs 97,000 crore borrowing option, the first one mentioned above, the loan will not be considered as debt on states’ books and the entire borrowing cost — principal and interest repayment — will be borne by compensation cess fund (to be extended beyond June 2022). Whereas, states will pay interest on the higher Rs 2.35 lakh crore loan option, and a large chunk of it would be treated as states’ debt.

Both the estimated amounts of shortfall are adjusted for the estimated cess collection of about Rs 68,000 crore in the current fiscal.

Although states choosing option 1 would still have entitlement to claim shortfall given it would be equal to option 2 amount, the note said that to the extent the shortfall is not made good, the states would still be eligible to get it in arrears after the transition period through extension of the cess, “if so decided by the Council”. Of course, an element of uncertainty prevails.

Further, if states choose option 1, they can carry forward to the next fiscal the unutilised borrowing space of 1% of G-SDP, of what was provided earlier as part of Covid-19 stimulus package, unconditionally.

The states can also carry forward the other 1% (the total additional space allowed was 2% of GSDP) also but it will remain contingent on reform measures as announced earlier.

The government had raised borrowing limit to 5% from 3% of G-SDP in May to enable states to borrow an additional Rs 4.28 lakh crore.

It is to be noted that even if Covid-19 hadn’t occurred, the states would have faced a big GST shortfall (against protected level) in the current fiscal. And the Centre admits this in the note. The GST was launched with its weighted average rate being significantly below the revenue neutral rate estimated; a series of rate cuts by the GST Council and the below-optimal efforts at plugging revenue leakage/evasion indeed widened the gap. As the finance ministry stated recently, as against the revenue neutral rate (RNR) computed by the RNR Committee of 15.3%, the weighted GST rate at present is just 11.6%.

Despite the Centre having already transferred Rs 1.34 lakh crore to the states in April-June, which is even more than its gross tax collections in the period, states’ market borrowings in aggregate more than doubled to Rs 1.7 lakh crore in the June quarter from the year-ago level.

States’ combined fiscal deficit in FY20 is believed to have significantly exceeded the 2.6% level estimated; Covid-19 crisis would exacerbate their fiscal positions in FY21.

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