Context: Recently, the 41st Goods and Services Tax (GST) council meeting was held to discuss the issue of compensating states on account of revenue loss due to implementation of GST and fall in cess collections.
Key Points
Shortfall in GST and Cess Collection

• The economic slowdown had reduced both GST and cess collections in FY 2019-20, resulting in a 40% gap (shortfall) between the compensation paid and cess collected.
• The central government paid over Rs.1.65 lakh crore in 2019-20 as GST compensation by utilising the excess cess amount collected during 2017-18 and 2018-19.
• The state’s GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore.

Issues

• Compensation issue: GST dues owed to states—computed on the basis of the 14% annual growth. The compensation was guaranteed by the Union government ahead of inking the GST compact. GST reform was cultivated through mutual give-and-take between members of the Council ever since GST was launched on 1 July 2017.
• Coercive federalism: The non-payment of dues to states which was decided also jeopardizes the idea of cooperative federalism. The time when the nation, under external (unwarranted military aggression by China) and internal threats (from the covid-19 pandemic), needs to stick together.
• Fall in revenue: the covid-19 pandemic-induced lockdowns have caused economic havoc—one of which is manifesting in a massive tax revenue shortfall, both for the central and state governments.
• Poor tax collection: If the economy is projected to contract 5-10% in the full year, tax revenues are going to fall.
• Increasing demand for bailouts from various constituencies afflicted by the pandemic.

Challenges before GST council
The immediate task before the GST Council is three-fold

• It needs to fix the flawed GST architecture drowning under the weight of myriad rates.
• It has to address the monumental challenge posed by the covid-19 pandemic-induced economic meltdown on GST collections.
• The issue involving states’ dues needs to be resolved amicably. Especially before it reaches the judicial clutches.

Caused by the impact of Covid-19

• The Finance Minister termed the fall of GST revenue due to Covid-19 as an act of God. However, the GST Compensation Act, 2017 did not foresee an act of God.
• The GST Compensation Act, 2017 guaranteed states that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
• Sin goods are goods which are considered harmful to society and individuals.
• Example of sin goods: Alcohol and Tobacco, Candies, Drugs, Soft drinks, Fast foods, etc.

Offers Made by the Centre

It offered two options for borrowing by states to meet the shortfall:

• A special window could be provided, in consultation with the Reserve Bank of India (RBI), so that the states can get Rs. 97,000 crore at a reasonable rate of interest, the amount can be repaid after five years (of GST implementation) ending 2022 from cess collection.
• Another option is that this entire gap of Rs. 2.35 lakh crore can be met by the borrowing by the states in consultation with RBI.
• The states have been given seven days to decide which option they want.
• Also, states choosing the first option would get 0.5% relaxation in states’ borrowing limits under the Fiscal Responsibility and Budget Management Act, 2003.
• The borrowing plan is valid for FY 2020-21 only and the GST Council would review the revenue position next fiscal to decide on payments for 2021-22.

Road Ahead

• The GST council can consider increasing the cess or including more products under the cess or compensation levy can be extended beyond five years, to meet this GST shortfall.
• Fiscal stimulus: Union government needs to step up spending to protect lives, and now has to generate funds for an economic stimulus.
• Strong political will and art of bargaining: All three challenges require a strong political leadership and resolve. Political intervention and cooperative federalism are required at the highest level to save India’s boldest economic reform experiment.