Govt reluctant to extend GST aid to states beyond June 2022

State governments on Friday looked coming up against a fiscal cliff in FY23, as the Centre made it clear it can’t extend the GST revenue compensation mechanism for them beyond the five years through June 2022.

This leaves the states with no option other than to rely on a near comprehensive revision of the goods and services tax (GST) rates and possible pick-up in economic growth to soften the looming revenue shock.

The GST Council, which met in Lucknow on Friday, however, decided to set up two groups of state finance ministers (GoMs) soon: one to look at ‘rationalisation’ of the rate structure and another to deal with compliance and technology issues, reflecting the urgency felt by the council to bolster the revenues. Both the panels will submit the reports in two months.

The Council also extended the tax waiver/sops for a clutch of Covid drugs by three months to December 31 and gave such tax relief for many more drugs, including some other lifesaving drugs and anti-cancer medicines.

The Council approved a proposal of its fitment committee to make e-commerce operators Swiggy, Zomato liable pay GST (at 5%) on restaurant services supplied through them, effective January next year; the tax will be charged at the point of delivery.

The move is aimed at shifting the responsibility of collecting the tax from restaurants to the apps to make compliance easier and certain, however, it could marginally increase the tax incidence on small restaurants, otherwise exempt from GST (annual turnover less than Rs 20 lakh), analysts fear.

After the 45th meeting of Council, Union finance minister Nirmala Sitharaman said even for servicing the special minimal-cost loan facility extended to states for FY21-FY22 to bridge the huge shortfall in the compensation fund pool, the designated cesses levied on certain “luxury and demerit” goods like automobiles, cigarettes and paan masala would need to stay till the end of FY26. The compensation requirements have been falling short of the cess proceeds since FY20, and the gap widened dramatically in FY21; for the current financial year too, the shortfall of the cess fund is seen at a whopping Rs 1.59 lakh crore, despite the robust GST receipts in recent months.

Scotching rumours about inclusion of petrol and diesel in the GST, Sitharaman clarified that the item was on the agenda of the Council merely because the Kerala high court order asked it to consider the same . “On the direction of the court, it was brought up and the members spoke very clearly that they do not want (the two auto fuels) under GST,” she said.

The constitutionally mandated compensation system is exclusively funded out of the cess kitty, rather than the consolidated fund of India, the minister noted, alluding to lack of resources for extending the special succour to the states. The aid, which virtually ensures states 14% annual growth in the relevant revenue to states during the initial five years of GST, has stood them in good stead, even as GST’s structural infirmities and reckless rate cuts have undermined the tax’s revenue potential and the pandemic exacerbated the situation.

GST compensation transferred to states during FY21 (amounting to over Rs 2 lakh crore) through the cess and the back-to-back loan routes was over 9% of their total state revenue receipts (tax and non-tax) in the year. This is even as another Rs 81,179 crore is yet to be transferred to states for last fiscal year’s GST revenue shortfall against the promised level.

Tamil Nadu finance minister PTR Palanivel Thiagarajan told FE: “What they (TN officials who attended the meeting in his absence) told me was the compensation issue has been deferred to the next meeting. Some options were presented and, obviously, people could not make an immediate decision on such a complex issue.” He added that the state would expect a detailed note from the Centre on the issue.

Kerala finance minister KN Balagopal said the Council discussed the issue of extending compensation. “Revenue loss of States is a serious issue. We raised the issue in the meeting. A Group of Ministers will be formed to look into this issue,” he said.

However, a statement issued by the Centre merely said: “On the issue of compensation scenario, a presentation was made to the Council wherein it was brought out that the revenue collections from Compensation Cess in the period beyond June 2022 till April 2026 would be exhausted in repayment of borrowings and debt servicing made to bridge the gap in 2020-21 and 2021-22. In this context various options, as have been recommended by various committees/ forums were presented.”

Chandrima Bhattacharya, minister of state for urban development and municipal affairs in West Bengal, who attended the council meeting, said: “Many states, including West Bengal, have asked for an extension of the compensation period by another five years (from July, 2022. This needs an amendment in the GST (Compensation to States) Act. Though she said the matter was also referred to the GoM on rate rationlisation, official sources from the Union government was non-committal on this.

Lower growth in state GST collections due to the absence of compensation could jeopardise state government’s capex plans in the medium term. State GST (SGST) accounted for two-fifths of the aggregate own tax revenues of the state governments in the last three fiscal years.

The weighted average GST rate is around 11.5% at present, as against the revenue neutral rate of 15.5% estimated originally.