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In the Parliamentary discussion on Monday, the Centre acknowledges that an amount of ₹81,179 crore was yet to be released to the state governments. This amount was to fully compensate the state governments for their goods and services tax (GST). This revenue shortfall is observed for the financial year 2020-21.

The statement raises the question as to how the amount would be mobilized. And, increases the chances of widening the RBI-facilitated special borrowing window. Under this scheme, the Centre raises low-cost loans to bridge a yawning shortfall arising in the designated cess kitty.

GST

While several states have been vocal about these dues, the Centre hasn’t categorically endorsed the claims so far. The written reply in the Lok Sabha by the finance minister of state, Pankaj Chaudhary did not address the questions on settlement. The statement remains silent on how and when the amount will achieve a settlement.

Against the states’ estimated total GST compensation requirement of a huge ₹2.82 lakh crore for 2020-21. Only, a little over ₹2 lakh crore were transferred to states in the respective year. The amount also includes over ₹85,000 crores collected via the designated cesses on demerit goods. Including another ₹1.1 lakh crore under the special back-to-back loan facility. The loan mechanism doesn’t entail any direct financial cost to the states. However, the delayed release of the compensation amounts, under the relevant laws on a bi-monthly basis; has increased the states’ borrowing requirements.

Reasons for the GST shortfall

2020-21 was the first year when the cess proceeds fell short of the states’ compensation requirement. This was largely due to the pandemic but also because of the series of rate cuts in GST. The series of rate cuts brought down the weighted average GST rate to around 11%, against a revenue-neutral rate of around 15% before the launch of the destination-based consumption tax.

The GST revenue shortfall (S-GST shortfall) seems to be a massive ₹2.6 lakh crore for the current financial year as well. Or, as per the estimate of some analysts the shortfall will be even higher.

YAWNING GST

While the estimated GST compensation for April-May 2021 was ₹55,345 crore. The Union government released a total of ₹75,000 crore, on July 15 to the states. The release aims to bridge the GST revenue shortfall of states. This was an addition to normal GST compensation. The Centre releases normal GST compensation, every two months out of actual cess collections.

The funds for the release of ₹75,000 crore on July 15 came from the borrowings of the Union government in 5-year securities. Totalling ₹68,500 crore and 2-year securities for `6,500 crores in the current financial year at weighted average yields of 5.60% and 4.25% per annum, respectively.

However, the government said that thanks to the reduction in Covid-19 case numbers and easing of the lockdowns. The e-way bills generation by businesses rose to 5.5 crores in June, from 3.99 crores in May. This upward trend is indicating a smart recovery of trade and business. For more such updates, keep watching this space!

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