GST transfers to States are falling short of what was promised

With Central GST collections falling short of expectations, States too are feeling the pinch. Under the GST Act, States which experience a tax revenue growth of less than 14 per cent per annum are liable to be compensated by the Centre for the first five years, as part of the transition plan. Under the Act, a compensation cess will be levied on select goods and services, including imports, till July 2022 to raise this sum. However, at least five States have said that the Centre owes ₹40,000 crore by way of dues. It is a fact that GST collections are lagging behind the generally accepted monthly benchmark of ₹1 lakh crore, including the compensation cess. The unprecedented economic slowdown would suggest that this crunch is here to stay for a while. Yet, to preserve the sanctity of contract, the Centre must address this problem amicably, at the earliest.

The GST process is a triumph of cooperative federalism, with the States ceding their taxation powers for the larger goal of creating a uniform, business-friendly tax landscape across the country. A plethora of taxes was done away with in this grand bargain, in the hope that higher economic activity would eventually offset any revenue loss. To be sure, efficiencies in logistics have been realised, while uniform, largely predictable rates (the GST Council seems to have gradually stabilised matters on this score) have removed a significant element of uncertainty for investors. However, any hint of a breach of faith can rock the GST project. It must not be forgotten that about 60 per cent of the States’ revenues come from the GST, which includes the SGST collection, the States’ share in IGST collections and the compensation cess. The IGST revenues account for half the total collections (in October it was ₹46,570 crore out of ₹95,380 crore) while the cess accounts for about 7 per cent. The Centre’s present practice of making adhoc part-payments of its IGST dues to the States has given rise to heartburn. The GST collections are down for a number of reasons. If the economic slowdown is the single biggest factor, fake invoicing and compliance headaches have also complicated matters. Tax harassment, despite numerous assurances by the Finance Minister, remains a reality on the ground. Under pressure to meet revenue targets, the tax officials have been contesting tax payouts, often moving arbitrarily against enterprises. Such actions impact business sentiment; meanwhile, delays in GST tax credit disbursements have played a major role in the liquidity crunch in the industrial sector. Tardy implementation, a factor flagged by the CAG earlier this year, comes with an economic cost.

An economic recovery will take care of most of these concerns of States, while a friendly tax administration will improve tax buoyancy, which has not been impressive in the post-GST phase.

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