Key Opposition-ruled states have strongly contested the Centre’s goods and services tax (GST) shortfall estimation for FY22 and claimed an underestimation of at least Rs 55,000 crore in the projections.
They have also sought an additional compensation of Rs 65,000 crore for FY21. The states argue that the actual revenue growth in the 10 months of April-January was negative against a 7 per cent expansion estimated by the Centre last year. “We do not agree with the Centre’s estimation related to the GST compensation requirement for FY22. It has underestimated the compensation requirement by at least Rs 55,000 crore and it must be reviewed at the earliest,” said a state finance minister.
He said according to the state’s assessment, the compensation requirement in FY22 will be Rs 3.23 trillion. “This means that the borrowing requirement is not Rs 1.58 trillion, but Rs 2.13 trillion as the remaining is expected to be met from cess collection.”
The finance ministry on Friday proposed market borrowing of Rs 1.58 trillion to compensate states for the GST shortfall through back-to-back loans, like last year, assuming a 7 per cent growth in revenues.
The GST compensation requirement has been pegged at Rs 2.7 trillion for FY22, of which Rs 1.1 trillion is likely to be met through cess collection.
Another state finance minister said the actual growth in the April-January period, for which the borrowing was done, was actually (-) 3 per cent instead of the assumed 7 per cent. According to him, this translates into an additional borrowing requirement of Rs 63,248 crore for the Centre to fully compensate states. Chhattisgarh Health Minister TS Singh Deo, who represents his state in the council, argued that most states were dissatisfied with the compensation projection this year. “How can 7 per cent become a precedent? Every time there is a shortfall.”
Kerala Finance Minister K N Balagopal said that assuming a 7 per cent growth for FY22 may not be correct and steps must be taken to revisit the estimation. “In Kerala, we are doing a lot of welfare work and activities related to Covid-19 for which the Centre is not helping. At least, the Centre must compensate states for the GST immediately. We need payments. Assuming a 7 per cent growth in FY22 is not right. The council and Centre must take corrective steps.”
Punjab Finance Minister Manpreet Singh Badal said, “We need to calculate compensation in the manner prescribed in Section 7 of the GST compensation Act. Anything done otherwise is arbitrary. We cannot apply 7 per cent compounding on an already arbitrary rate of growth of the previous year to calculate the actual revenue.”
Meanwhile, the Centre has projected a gap of Rs 30,000 crore spilled over from last year, which it expects to meet through Rs 1.58 trillion borrowing proposed for FY22.
While the Budget 2021-22 has estimated GST revenues to grow by 17 per cent over last year, the target appears challenging, given that localised lockdowns across the country have impacted supplies.
Last year, the Centre had estimated a GST compensation requirement of Rs 2.35 trillion, of which Rs 1.1 trillion was met by way of borrowing and another Rs 70,000 crore came from compensation cess collection. This leaves a gap of Rs 55,000 crore. This the government had promised to fulfil over a course of time.
Aditi Nayar, chief economist, ICRA Ratings, said, “In our assessment, in FY22, the gap between GST requirement and cess collection is likely to be Rs 1.65 trillion, which is very similar to the amount of Rs 1.58 trillion estimated by the ministry of finance. However, the spillover from last year to this year is not clear at this point in time.