GST compensation to states to see shortfall of Rs 15,000-25,000 crore in FY20: ICRA

Credit Rating Agency ICRA has said there could be a shortfall of around Rs 15,000-25,000 crore in GST Compensation Fund to states in FY20. States' requirement of GST compensation for the October 2019-January 2020 period is pegged at Rs 60,000-70,000 crore. In the current fiscal, the Centre has already released Rs 1 lakh crore worth compensation for the February-September 2019 period. ICRA says the growth in GST collection has improved to 7.7 per cent in November to January 2020.

"ICRA projects the GST compensation required by all the states for October 2019 to January 2020 at around Rs 60,000-70,000 crore, which the GoI (Centre) is likely to disburse in the remainder of FY2020. Given the balance of around Rs 17,000 crore available in the GST Compensation Fund in December 2019, and the amount of compensation cess of around Rs 28,000 crore estimated to be collected in Q4 FY2020, this suggests a shortfall of around Rs 15,000-25,000 crore in the GST Compensation Fund at end-FY2020," said Jayanta Roy, Group Head - Corporate Sector Rating, ICRA.

Based on the trends in cess collection and GST compensation during FY18, FY19 and FY20 (till December 2019), the balance available in the GST Compensation Fund could be around Rs 17,000 crore, ICRA said. The Centre has pegged the cess collection at Rs 98,000 crore in FY20, of which Rs 70,500 crore had been collected till December 2019. This suggests the Centre expects a further inflow of around Rs 28,000-crore cess in the fourth quarter of this fiscal.

Also, there's been a steady increase in the compensation released to states in FY20 so far -- Rs 35,300 crore for August-September 2019 from Rs 17,790 crore for April-May 2019, and Rs 27,960 crore for June-July 2019. Compared to 3.4 per cent growth in the headline GST collection in the April-October period, it improved to 7.7 per cent in November-January 2020, which may compress the compensation requirement of the states, the ICRA report opines.

Also read: Govt to release due GST compensation to states in 2 installments

In her Budget 2020 speech, Finance Minister Nirmala Sitharaman hinted to transfer balances due of the previous years to the GST Compensation Fund in two instalments, following which the transfer of funds will be limited to the collection by way of GST compensation cess.

The GST (Compensation to States) Act, 2017, has a provision to compensate states for loss of revenue, if any, on the items subsumed under the Act assuming a secular 14 per cent growth rate for such items over the FY16 revenues for five years after its introduction. Based on the recommendations of the GST Council, a cess is levied and collected on the sale of specific goods and credited to a non-lapsable GST Compensation Fund. The GST compensation is released to the states at the end of every two months.

The Centre and non-BJP ruled states have been at loggerheads over the past few months on the topic of GST compensation. Some states like Punjab and Kerala have accused the Centre of delaying the release of GST compensation cess. States depend heavily on these funds to meet public expenditure.

This week on Monday, MoS Finance Anurag Thakur also told the Lok Sabha that the Centre would release all due GST compensation to states in two instalments. Thakur said the GST Compensation has been released till September 2019 and the next bi-monthly GST Compensation is due for October-November, 2019. The minister said a total of Rs 2,10,969.49 crore had been released as GST compensation to states so far, including union territories, after implementation of the GST in 2017.

Also Read: What can GST Council do to augment tax collection; these are the key trends to watch out for