Centre, states stare at Rs 2-trillion GST cess gap amid Covid-19

Economists estimate that the cess collection may fall short by Rs 1.5-2 trillion viz a viz the compensation requirement, suggesting that the government may again need to borrow from the markets to fill the gap like last year | Illustration: Ajay Mohanty
With the government anticipating goods and services tax (GST) collection to fall below Rs 1 trillion in June -- the first time in nine months -- owing to Covid-led disruption, compensation to states is set to exceed cess collection for the second year in a row.

The GST compensation of states is expected to widen to Rs 2.5-3 trillion in FY22 as against the cess collection of Rs 1 trillion estimated in the Budget. It is higher than Rs 2.35 trillion compensation requirement estimated last year by the Centre for FY21.

Economists estimate that the cess collection may fall short by Rs 1.5-2 trillion viz a viz the compensation requirement, suggesting that the government may again need to borrow from the markets to fill the gap like last year.

However, the Centre may agree to borrow part of the shortfall due to GST implementation and not due to Covid-19 under the special window and give to states as back-to-back loans, like last year.

“The deceleration in e-way bill generation in April and May indicates a nearly 30 per cent decline in collection in May against April and collection may fall below Rs 1 trillion in June. There is lack of economic activity in industrial states. Demand may show some pickup from July, which will show up in GST collection,” said a government official.
Recovery will hinge on opening up in producing states like Karnataka, Maharashtra, and Tamil Nadu.

Another official pointed out that a team of officers was assessing the impact of anticipated slowdown in GST mop-up on compensation this year. This may be presented before the GST Council in its meeting on Friday.

“It will have to be seen how much of the shortfall is due to Covid-19 and how much due to GST implementation, if Option 1 is to be exercised. Borrowing the entire amount of shortfall would impact yields,” he said.

Aditi Nayar, chief economist, ICRA Ratings, said while the state GST inflows were estimated to be twice those of last year in the first quarter at Rs 1.7 trillion, “early estimates suggest a GST compensation requirement of Rs 2.5-2.7 trillion for FY22”.

Nayar added the protected revenues for the state governments for FY22 were estimated at Rs 8.7 trillion.

Devendra Kumar Pant, chief economist, India Ratings, estimated the GST compensation requirement at around Rs 3 trillion, of which only Rs 1 trillion may be collected by way of compensation cess, leaving a gap of Rs 2 trillion.
“The localised or regional lockdowns in 2021, though not as stringent as the national lockdown of April and May last year, will have an impact on tax collection. GST collection in the first half of FY22 is expected to continue double-digit growth performance. Based on the present status of Covid-19 infections and localised/regional lockdowns, the cess shortfall could be around Rs 2 trillion,” said Pant.

States were promised compensation for five years after GST implementation in July 2017, assuming a 14 per cent annual growth rate since states lost autonomy over indirect taxes. The compensation cess is levied on a few items in the 28 per cent GST slab such as automobiles, cigarettes, and aerated drinks.

Last year, Centre had estimated a cess shortfall of Rs 2.35 trillion for 2020-21. Of the amount it attributed Rs 1.1 trillion to GST implementation and the rest to Covid. As such, it offered a special borrowing window of Rs 1.1 trillion and the states were additionally allowed to borrow by 0.5 per cent of their respective state GDP from the markets. It had proposed two options. First, borrowing Rs 1.1 trillion, where the interest cost will be paid through the extended cess period, or borrow the full Rs 2.35 trillion, where the cess will be used for paying only the principal, not the interest.

Government has released Rs 70000 crore to states as on March 2021 for FY22 of Rs 85500 crore collected by way of cess.

Goods and services tax (GST) e-way bill generation decelerated further in May, with the daily average falling to a one-year low of 1.21 bills compared to 1.95 in April, indicating a sharp slowdown in economic activity due to second Covid-19 cases.

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