Good news on the GST front, timely payments are crucial to states
GST collections are going gangbusters. April’s revenue haul at Rs 1.67 lakh crore is the highest in five years since the new indirect tax regime began in July 2017. Moreover, monthly collections have been steadily scaling fresh highs and gone past the Rs 1 lakh crore mark for 10 months straight. In FY22, revenue growth shot up 30.8% to Rs 14.9 lakh crore, and the run rate suggests it could get even better this fiscal.
Analysts believe the double-digit growth was on a low base and that it could settle for a 10–12% annual increase going forward. But even this is good news for both the Centre and the states, which are at crossroads regarding the sharing of compensation cess that’s about to end next month. The cess levies will continue till March 2026 as such and the proceeds will be used to pay off FY21 out-of-turn borrowings to compensate states. But states want compensation cess beyond June, while the Centre, reportedly, is considering changes in the cess levies. It’s essential for the Council to reach a decision without significant differences and delays.
While Finance Minister Nirmala Sitharaman rightly acknowledged the contribution of states, the Centre continues to be behind its payments. For FY22, it released only eight months compensation dues to states and must clear the four months backlog of Rs 78,700 crore. Timely payments are crucial to states, whose off-balance sheet borrowings touched a decadal-high according to Crisil Research. Improved compliance, better tax administration and the rebound in economic activity must give the Council enough room to manoeuvre, particularly related to rate rationalisation and improving revenue neutrality.
In February, the 15th Finance Commission suggested merging the 12% and 18% rate slabs into one, besides raising the current 11.8% incidence of GST duty to a revenue-neutral rate of at least 14%. The Council’s next meeting, a milestone having completed half-a-decade in existence, must deliberate on the above aspects besides considering phasing out of exemptions on products subjected to state VAT, and deliberate on rate tweaks of special categories like gold and gold jewellery.