GST Compensation due to States | UPSC
What is the GST compensation due to States?
WHY IN NEWS:
Why is the Centre asking them to borrow from the market to make up the shortfall? What are the options?
SYLLABUS COVERED: GS 3:Taxation
For PRELIMS understand the devolution of finances and the GST shares divided between the states .
For MAINS look out for calculation and structure of GST . Find the drawbacks and list them down .
- The 41st meeting of the GST Council was held on August 27.
- The singular agenda of meeting was to ensure that the compensation payable to the States as part of the implementation of the GST continues to be paid.
- The background for the meeting was the fact that the Centre and the States were cognisant of the substantial impact on GST collections from the last fiscal year’s economic slowdown.
- This will be about ₹2.35 lakh crore at the end of the current financial year .
- FM suggested two borrowing options that the States could choose from to bridge the shortfall.
WHAT IS THE GST COMPENSATION?
- The Constitution 101st amendment Act, 2016, was the law which created the mechanism for levying a nationwide GST.
- The adoption of the GST was made possible by the States ceding almost all their powers to impose local-level indirect taxes.
- Thus agreeing to let the prevailing multiplicity of imposts to be subsumed under the GST.
- While the States would receive the SGST (State GST) component of the GST, and a share of the IGST (Integrated GST).
COMPUTATION OF THE SHORTFALL
- The computation of the shortfall — the mechanism for which is spelt out in Section 7 of the GST (Compensation to States) Act, 2017.
- It is done annually by projecting a revenue assumption based on 14% compounded growth from the base year’s (2015-2016) revenue.
- Thus calculation is the difference between that figure and the actual GST collections in that year.
- With the Compensation Fund expected to have only about ₹65,000 crore through cess accruals and balance to pay the compensation to the States.
HOW DO BORROWING WORK?
- The Union government has proposed that the States borrow directly from the market by issuing debt under a special window coordinated by the Ministry of Finance.
- The Centre has also contended that of the projected shortfall of about ₹2.35 lakh crore, only ₹97,000 crore is the deficit arising out of GST implementation.
- Option 1 entails the States selling debt securities in the market to raise the ₹97,000 crore.
- The Centre will “endeavour” to keep the interest cost on these borrowings “at or close to” the yield on G-Sec .
- This additional borrowing by the States will not be accounted for as a part of the State’s debt for purposes of its overall debt calculation.
- Option 2, the States can sell debt in the market to raise the entire ₹2.35 lakh crore shortfall but with the terms of the borrowing being far less favourable.
- Crucially, here the interest cost would have to be borne by them with only the principal being serviced by the Compensation Fund.
- Several States, including West Bengal, Kerala, Punjab and Tamil Nadu, have rejected the options .
- They made it clear that the onus is on the Centre to borrow from the market to make good any shortfall in the Compensation Fund.
- Observing that States have suffered severe losses in revenue in the wake of the pandemic.
- Tamil Nadu said any delay in ensuring the compensation payments would compromise essential capital spending by the States to restart the economy effectively.
- These States dismiss the Centre’s contention that any additional borrowing by it would have deleterious macro-economic consequences .
- They point out that global credit rating agencies essentially monitor the overall general government deficit and borrowing levels.