States to get Oct-Nov GST compensation before next Council meet

The Centre will pay out compensation to states for the October-November period before the next Goods & Services Tax (GST) Council meeting tentatively scheduled for March 14, albeit after a two-month delay, further weighing on state finances for the current fiscal year.  

The meeting is expected to be a stormy affair, with states likely to raise concerns over delay in compensation release and the Centre backing out from the 14-per cent assured revenue compensation. 

With the release happening with a lag of two months, the compensation for the December-January period, which was to be paid in March, will cross over into the next fiscal year. The meeting will also see discussions on the possibility of GST rate hike and cess increase to augment revenue amid compensation cess shortfall due to economic slowdown. 

“We will disburse compensation of around Rs 35,000 crore to states for the October-November period before the next Council meeting,” said a government official. 

 “Nevertheless, states are expected to raise the issue over delay in release of compensation as they are facing revenue stress and need to close books for 2019-20 in March,” he said. 

He added that next two instalments will be tough, with cess shortage for the fiscal year to hover around Rs 25,000-30,000 crore, which is expected to be a moot point of debate at the Council meet. 

GST revenue of 23 states till end-December was Rs 15,100 crore — lower than last year’s (or 4.9 per cent decline year-on-year). If revenue loss is assumed on the basis of 14 per cent growth, it would mean a shortfall of Rs 69,000 crore for these states till December. The loss would be much more, since 14 per cent growth for compensation in the GST laws is taken on the base year of 2015-16 (FY16). The data for the five, including Goa, Bihar, and Delhi, could not be accessed. 

The Centre will likely recommend extending compensation cess period by one year to make up for the shortfall of the previous five years. However, states have been demanding extension of compensation cess to get an assured 14 per cent revenue growth for an additional one-two years.

The Centre had promised states bi-monthly release of GST compensation, but has defaulted on the timeline since September. Compensation for August-September worth Rs 35,298 crore, to be released in October, was finally disbursed two days ahead of the GST Council meeting on December 18.

It was released after some Opposition-ruled states, including Kerala and West Bengal, threatened to approach the Supreme Court over delay in release. Besides, the Centre has made it clear that it will only compensate states to the extent of cess collection, against the assurance of compensation — assuming a 14 per cent growth rate on the base year of FY16 for a five-year period since GST roll-out.

The revenue augmentation officers’ panel had recommended correcting the inverted duty structure prevalent in the case of mobile phones, footwear, fabrics, LED lights, pharma, etc, besides moving items from 5 per cent to 12 per cent slabs to a higher rate and pruning the exempted list.  It had ruled out hiking compensation cess rates, arguing it would not yield much revenue.

 The Centre has estimated a compensation cess shortage of Rs 63,200 crore in 2019-20 (FY20). In the first 10 months of FY20, GST collection grew 4.6 per cent. The Centre will transfer a surplus from the previous two years of Rs 35,000 crore in two instalments to the compensation fund. This still leaves a gap of around Rs 28,000 crore.

Compensation cess collected till December was Rs 70,499 crore, Compensation cess collection is Rs 7,000-8,000 crore a month, against the compensation requirement of Rs 14,000-15,000 crore a month.

“It is decided to transfer to the GST compensation fund balances due out of collection of the years 2016-17 and 2017-18, in two instalments. Hereinafter, transfers to the fund would be limited only to collection by way of GST compensation cess,” Union Finance Minister Nirmala Sitharaman had said in her Budget speech.

An official at the Centre said, “The law is very clear. It says that for the purpose of paying compensation, compensation cess will be introduced. Compensation will be given from that. If that cess is not coming up to the required amount, the law does not say that you can take it from central GST…it does not say that the Government of India will pay from its pockets.” 

States are free, he added, to increase the GST or cess rates to get full compensation.