NEW DELHI: Even though financial constraints have forced states to accept the Centre’s formula for resolving the issue of less-than-promised GST compensation, stagnant revenue collections are likely to keep the matter simmering until the next GST council meeting.
“GST collection was going down even before Covid. We do not see the situation improving before the middle of next year, so the issue will be remain a challenge for the next year too and will keep on surfacing. The Centre will have to figure out a more stable solution,” a senior official from finance ministry said.
Under GST law, states were guaranteed payment for any loss of revenue in the first five years after the implementation of the GST regime starting July 1, 2017. The shortfall is calculated assuming a 14 per cent annual growth in GST collections by states over the base year of 2015-16.
However, post Covid since collections started falling drastically, the Centre stopped paying the compensation citing revenue issues.
The GST shortfall has been pegged at Rs 2.35 lakh crore, with the finance ministry stating that Rs 1.10 lakh of the shortfall is due to GST implementation, and rest due to Covid-19.
Finance Minister Nirmala Sitharaman had proposed two options to the states.
They could either borrow Rs 1.10 lakh crore through a special window facilitated by the RBI, or the complete shortfall of Rs 2.35 lakh crore from the market.
Many states rejected this offer and asked the Centre to borrow the full amount needed to offset the shortfall.
This had led to a tussle between the Centre and the states. But the finance ministry stuck to its offer. Covid-19 and the fund crunch eventually forced the states to take the Centre’s offer, but the ugly war of words has caused a serious breakdown in trust between the Centre and the states.
Going forward, the finance ministry is planning to conduct a special meeting with the states and the Finance Commission in February over the issue in an effort to resolve the matter.
Falling revenue is another concern. Both the Finance Commission and the CAG have pulled up the revenue department for overinflated GST targets, drastically revised downwards in the budget.
In 2019, the government had set up a high-level committee of officers to look into the shortfall and suggest measures to augmenting collections, but collections have remained stubbornly sub-optimal.