The Centre is facing an insurmountable task of compensating the states for loss in revenue due to implementation of GST as compensation requirements are likely to go up 50 per cent in 2020-21.
According to finance ministry sources, the per month compensation requirement for states will go up from Rs 14,000 crore in 2019-20 to Rs 20,250 crore in 2020-21.
The centre is already struggling to fully compensate the states for dues in 2019-20. It has not paid to states the compensation for December 2019 to March 2020 as their compensation requirements far outpace the collections. According to the government sources, on an average, the monthly GST compensation cess requirement in 2019-20 was to the tune of Rs 14,000 crore, while the cess collection average was only in the range of Rs 7,000 to Rs 8000 crore per month.
In 2020-21, the finance ministry estimates that the average monthly compensation requirement will be as high as Rs 20,250 crore. And going by the Compensation Cess collected in the last two years - Rs 95,000 crore 2018-19 and Rs 97,000 crore in 2019-20 - it is unlikely that Centre would be able to make good for the revenue loss states face in 2020-21.
The Centre has paid Rs 120,498 crore in compensation to states till October-November, and the dues for the four months to March are still pending. The dues for October-November (Rs 19,950 crore) were paid in February 2020.
It is to be noted here that the GST law provides that the gap between the protected revenue of the states and the GST revenue actually collected should be paid to states as compensation. The protected revenue is calculated at 14 per cent growth per annum on the base year figure of 2015-16 of the taxes subsumed in GST.
Given this precarious situation, the GST Council, the body which takes GST related decisions, is left with a few options to meet the compensation gap. One of the options is to either bring more items under the cess base by expanding the base of GST cess items or to increase cess rate on the existing items. According to finance ministry estimates, any increase in compensation cess on few items could only yield about Rs 2000-3000 crore a year.
Other options left were to either forego full cess compensation which was increasing at 14 per cent per annum or to go ahead with whatever compensation is available. One more option was to raise the tax rate on items by rationalisation of rates by shuffling slab rates.
The members of the GST Council have also suggested options like payment of compensation cess from the Consolidated Fund of India or through borrowings from the market.