GST compensation delay: States considering legal action against Centre

“We will take legal recourse if Centre does not release compensation. If cess collection is not adequate, let the Centre borrow and extend the cess period by another 2-3 years," says Thomas Isaac, Kerala FM
Some states are considering legal recourse against the Centre for delay in releasing the bi-monthly goods and services tax (GST) compensation, according to Kerala finance minister Thomas Isaac.

Rajasthan, Delhi, West Bengal, Punjab and Kerala issued a joint statement on Wednesday, after the empowered committee meeting of state finance ministers, urging Union Finance Minister Nirmala Sitharaman to release the compensation ‘without any further delay.’

The states were supposed to receive the compensation for GST revenue shortfall for August and September, sometime in October. 

“No explanation whatsoever has been furnished for this delay of nearly one month,” the joint statement said. States are facing acute pressure on fiscals and some are already resorting to ways and means or overdrafts,” it further said.

Rajasthan’s outstanding compensation dues stand at Rs 4,400 crore, while Punjab’s is Rs 2,100 crore, Delhi’s Rs 2,355 crore, Kerala’s Rs 1,600 crore and West Bengal’s is Rs 1,500 crore.

Business Standard has learnt from a senior government official that the Centre will release pending compensation funds before the end of November. “We will release the funds soon. There is usually a delay around this time of the year as internally we shift our projections from budgeted estimates to revised estimates. The pending compensation funds will be released soon,” the official said.

“There isn’t even a dispute mechanism available within the GST framework to raise such a concern,” Punjab finance minister Manpreet Badal told this newspaper.

 Bihar deputy chief minister Sushil Modi, who did not attend the meeting, said the dues of states must get cleared at the earliest. “Even if there is going to be a shortfall in the compensation fund, it should arise in the last two months of the fiscal and not now. There must be some procedural reason for the delay, which the Centre should explain to the states,” said Modi.

Compensation is released to states on a bi-monthly basis, with the latest compensation of Rs 28,000 crore disbursed in August.

Incidentally, cess collections under the GST to compensate states for the revenue loss have fallen short of the requirements in the current fiscal year on account of a slowdown in demand. 

Compensation cess is levied on a few items in the 28 per cent GST slab, such as automobiles, cigarettes and aerated drinks.

Kerala’s FM said that not releasing compensation could be the Centre’s pressure tactics to revisit the compensation package promised to states under GST, which assumed a growth rate of 14 per cent in revenues. 

“We will take legal recourse if the Centre does not release compensation. If cess collection is not adequate, let the Centre borrow and extend the cess period by another 2-3 years,” said Isaac.

There was a shortfall of around Rs 24,000 crore between the GST compensation cess collected till July and compensation disbursed to states to meet revenue shortfall. 

Slowdown in the auto sector contributed significantly to the bleak compensation cess collections. States were promised a compensation for 5 years since GST’s implementation to make up for the revenue shortfall, if any, since states lost autonomy over indirect taxes. 

Around Rs 41,000 crore was collected till July this fiscal, against Rs 65,000 crore worth of disbursements to states. The shortfall was met by the surplus of the previous fiscal year.  “States are requiring about Rs 13,000-14,000 crore a month against Rs 8,000 crore being collected by way of compensation cess,” said a government official. 

In fact, states are expected to demand an extension of the compensation period by another three years, beyond the stipulated 2021-22.

GST collections plummeted to a 19-month low in September at Rs 91,916 crore, and remained well under the Rs 1 trillion-mark for the third straight month in October at Rs 95,380 crore, which is 5.3 lower than the corresponding month last year.

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