Centre again faces GST compensation test
The Centre’s commitment towards cooperative federalism would be tested once again in the next GST Council meeting slated for the 17th of this month. The council is going to discuss two critical issues in the meeting—the extension of protected revenue of states and the rate of the protected revenue. With states having faced loss of revenue in the four years since implementation of GST, they are most likely to mount pressure on the Centre to not only extend the protected revenue regime by another five years but also ensure a protected revenue of 14% as was the case earlier.
Many states have been struggling with deficit in revenue due to implementation of GST. While the deficit in some states is due to genuine reasons, in many others the shortfall is purely because of the way it is calculated. The deficit is determined assuming that the state’s GST revenue has been growing at 14% every year since 2015-16. Any shortfall in a state’s GST collection based on the above calculation is considered as deficit. Now, the Centre has been trying to put across the message that if it had not promised a 14% protected revenue, many states might not have been in deficit at all, and would not have been required to be compensated.
The GST compensation bill of states has been ballooning, and this year it is estimated to go up to Rs 2.69 lakh crore. While the Centre levies cesses under GST to compensate the states for revenue losses, the GST cess collection itself is estimated to fall short by Rs 1.58 lakh crore from the actual deficit. This deficit is then funded by borrowing.
It has now been established that the Centre, in order to get the states on board for implementation of GST, promised much more than it could keep. But now most states—especially those not run by the BJP—are adamant on continuing this arrangement for another five years. To say that this is unsustainable for another five years will not be an exaggeration. Now, it is up to the Centre to try and convince the states to agree on something less than 14% protected revenue.