GST Uncertainty Continues

Context: The delays and the confusion in the decision making under the Goods and Services Tax (GST) Council could increase Centre-State friction.

Agenda before the Council: Issue of compensation to the states owing to a shortfall in the revenue collection

• Compensation: has been mandated through the GST Act 2016, for five years after the commencement of the act, with an assumption of a 14% annual growth rate.
• Shortfall in revenue: the shortfall in the current year, adjusting for compensation cess collection, is likely to be Rs 2.35 trillion.

• This is because of the two factors:

• Implementation problems in GST.
• COVID-related lockdown.

Measures taken by the Government.

• Centre has provided two options to the states: 

• Borrowing of Rs 97,000 crore at “a reasonable interest rate”, which can be paid after five years (of GST implementation) ending 2022 from cess collection, under a special window.
• Borrow the entire Rs 2.5 trillion shortfalls under the special window with a similar payback process.

• Relaxation in Borrowing: of 0.5% of the gross domestic product in the borrowing limit of states under the Fiscal Responsibility and Budget Management Act.

Challenges:

• Further Delay: will lead to more deterioration of the capabilities of the states:

• The states, being at the forefront of fighting the pandemic, are facing financial difficulties and are delaying salaries of their employees, including health care workers.
• Though the proposed arrangement is only for the current year, revenue could be under pressure in the next fiscal year as well.

• Unclear Measures:

• No clarity on the working of the funding mechanism if the states are not allowed to borrow from the market.
• Extension of Cess beyond 5 years will create uncertainty for businesses since it is not clear how long the Cess will be levied.

Conclusion: The overall uncertainty and delays will create more stress in Centre-state relations at a time when they are required to work closely to implement reforms and revive growth.