Icra finds FinMin's estimates of GST compensation gap much smaller

States are assured compensation if their GST revenues do not grow 14 per cent on the base year of 2015-16.
The finance ministry's estimates on the revenue losses expected for the states are not in line with similar projections by experts.

The ministry estimated that the states would lose out Rs three trillion this financial year, of which Rs 65,000 crore could be given from the compensation cess. So, the gap stood at Rs 2.35 trillion. 

Of this gap, Rs 97,000 crore is due to the implementation of GST and the remaining Rs 1.38 trillion due to the "Act of God" or Covid-19. 

However, estimates by Icra put the total gap at Rs 2.92 trillion against the ministry's estimates of Rs 2.35 trillion. 

"In the GST Council meeting, the finance ministry pegged this gap at Rs 2.35 trillion, appreciably lower than Icra’s estimate," the rating agency said.  

According to Icra, amid the Covid-19 pandemic and the associated lockdowns, the state goods and services tax (SGST) collections of all states and three union territories contracted by a sharp 47.3 per cent in Q1FY21 year-on-year. 
Based on its expectation of an uneven recovery in consumption in the remainder of this fiscal, Icra expected the SGST collections to decline by 21 per cent to Rs 4.01 trillion in FY21 from Rs 5.06 trillion in the previous year. 

States are assured compensation if their GST revenues do not grow 14 per cent on the base year of 2015-16. Icra expected this protected revenue to be Rs 7.65 trillion for FY21. As such, the compensation requirement appears set to double at Rs 3.64 trillion  for the current financial year from Rs 1.65 trillion in FY20. 

Since the GST cess is levied primarily on luxury and sin items, its collections may undergo a somewhat sharper drop in FY21 than the 21 per cent contraction estimated by Icra for the SGST revenues for FY21. If the GST cess collections in FY21 are 25 per cent lower than the Rs 95.600 crore collected in FY20 (Source: Comptroller General of India), it would mean inflows of Rs 71,700 crore as GST compensation cess in FY21.

This would leave a large gap of Rs 2.92 trillion between the GST compensation requirement of the states for FY21 and the cess collections expected in the current fiscal, said Icra. 

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