In September 2019, while Finance Minister Nirmala Sitharaman told the GST Council meet in Goa the Centre was facing fiscal constraints, the RBI had just transferred an unprecedented surplus of ₹1.76 lakh crore to the government and the Centre unexpectedly announced a massive corporate tax cut of ₹1.45 lakh crore. File photo: PTI
How Centre has bullied states over GST compensation over the years
Despite yawning delays and cess misuse flagged by CAG, Centre hasn't corrected the situation, and nor have Opposition states kicked up a fuss about compensation
On August 29, finance and revenue ministers from eight Opposition-led states convened in New Delhi to seek compensation for anticipated revenue losses stemming from the recent GST rejig – days ahead of the GST Council scheduled meet on September 3 to finalise the changes. The states expressed concern over a potential revenue loss of 15–20 percent.
But the GST Council, of which they are members, left the issue unanswered while approving the rejig.
Briefing the media about the decisions, revenue secretary Arvind Srivasatava said the rejig would lead to a revenue shortfall of Rs 48,000 crore on an annual basis – half of which, or Rs 24,000 crore, would be the loss for state governments as both Centre and states share the GST revenue equally.
Hardly a murmur
But Srivastava didn’t call it a revenue loss. He said “it would not be correct to term it a revenue loss”, which it is, and ruled out “any major fiscal implication”.
Presumably, he meant the GST rate cuts would spur consumption and thereby GST collections would rise to offset a part of the shortfall and the rest could be managed either by cutting government expenditure and/or borrowing from the market.
Yet, there hasn’t been even a murmur of protests from the Opposition-ruled states, which has raised a few questions.
Is it that India is witnessing the true spirit of “cooperative federalism” that Prime Minister Narendra Modi had promised in February 2015 and had urged the states to cooperate with the Centre? Or is it something else? At first glance, these questions may seem facetious but read on to know why they aren’t.
Basics of GST compensation
Before diving in, let's focus on the basics of the GST compensation.
One, GST compensation was paid to states when the new tax regime was adopted in 2017. It was meant to offset their revenue losses arising out of nine state indirect taxes that were absorbed into GST – along with the Centre’s eight. The base year for the revenue loss calculation was set at FY16 for each state.
The compensation amount was raised annually at 14 per cent based on the annual growth rate of those nine state indirect taxes in FY16.
Two, the compensation was to continue for five years and it did – from July 1, 2017 to June 30, 2022 – the time it was presumed the GST regime would take to stabilise.
Three, a GST Compensation Cess was instituted in 2017 for the Centre to mobilise revenues to compensate states.
Four, it was presumed that once GST stabilises, states would at least continue to maintain their revenue share from state GST (SGS) in relation to their respective Gross State Domestic Product (GSDP) and the 14 per cent growth in the state GST would continue.
But what eventually turned out to be is different.
How Centre short-changed states
The Finance Ministry think tank, National Institute of Public Finance and Policy (NIPFP), published a study last month, evaluating the impact of GST on state revenue during FY19-FY24.
It said, “apart from a few years and states”, state GST collection as a percentage of nominal GSDP falls short of the revenue subsumed into the GST in the base year of GST, i.e., 2015-16, as a percentage of the then-nominal GSDP”.
Of 18 major states it tracked, only six managed to better the baseline revenue share once: Andhra Pradesh (FY19), Haryana (FY24), Rajasthan (FY19), Telangana (FY19), Uttar Pradesh (FY19) and West Bengal (FY19). Maharashtra did it five out of six fiscals (except FY21) and the rest had none to boast of.
Even with the compensation, it found, though the performance was much better, many states missed the baseline revenue share. Of 18 major states, nine states missed it once, two states twice, three states thrice, one state four times. There were only two states (Haryana and Maharashtra) who never missed it.
This study brings to light another disturbing fact: “The GST compensation period concluded on 30 June 2022. Some states received arrears of GST compensation payments in 2023-24. Nonetheless, only six of the eighteen major states managed to sustain a higher SGST share in GSDP in 2023-24 compared to 2015-16.”
That is, the Centre delayed paying the GST compensation to states for two full years and yet no state made enough noise to hit the headlines. There are more disturbing facts, but they call for a backgrounder for clarity sake.
What happened in 2019?
GST was rolled out in July 2017. Having passed on the compensation to states from the GST Compensation Cess for the first three fiscals of FY18-FY20, the Centre sprang a surprise at the GST Council meet in Goa in September 2019.
It said it was facing fiscal constraints and wouldn’t be paying GST compensation any more. A formal letter to confirm this was sent to states in November 2019.
In public and in its official communications, the Centre told states to borrow from the market to meet their shortfall. The threat was carried out a year later in FY21 and FY22.
The Centre was clearly breaking the law – The GST (Compensation to States) Act of 2017 – which it piloted through the Parliament. It was also upending the Prime Minister’s promise of “cooperative federalism”.
Feeble protests
But states didn’t rise up to protest and challenge it in the courts of law. Their protests were muted and their voices feeble.
Later, administrative complexities arose (each state approaching the RBI individually for loans), forcing the Centre to take a loan from the RBI on their behalf. It borrowed Rs 1.1 lakh crore in FY21 and Rs 1.6 lakh crore in FY22 and gave those as “repayable” loans. The Comptroller and Auditor General of India (CAG), in its report tabled in Parliament last month, confirms that this indeed was originally meant to be repaid by states.
It says, the loans were “passed on to the States/UTs through Major Heads 7601/7602 (Loans and Advances) which indicates that the loans were recoverable from State/UTs”.
Where is Rs 6 lakh crore of cess?
Eventually, good sense prevailed. The Centre decided to repay the loan itself and amended the rules under the GST law on June 24, 2022 to extend the cess from June 2022 (when both the compensation and the cess were to end) to March 2026 to mobilise the funds to repay the loan.
Three-and-half years later, the Centre has not fully repaid the RBI loan of Rs 2.7 lakh crore. But here is the rub.
Budget documents show, during FY21-FY25 (RE) – when the Centre stopped paying GST compensation to states and forwarded loans instead, except the arrears – the Centre has collected Rs 6.1 lakh crore of GST Compensation Cess.
That is, the Centre has already collected 2.3 times more money through the cess than the loan it took by FY25, which would rise to 2.9 times by the end of FY26. But what has the Centre done with this huge fund?
No answer is available in public.
The budget documents mark the outgo of all these the GST cess receipts over the years to “GST Compensation Fund” – without revealing what happened then.
It is for the GST Council to demand answers and for the legislators to raise it in the Parliament – which hasn’t been the case so far.
Misappropriating GST cess
But the Centre’s mysterious actions shouldn’t surprise. Here is why.The CAG published a damning report in 2020. It said the Centre misappropriated Rs 47,272 crore of GST cess in FY18 and FY19 (in the run-up to its refusal to pay states the GST compensation) by transferring it to the Consolidated Fund of India (CFI) – instead of passing it on to states.
Cesses are meant for specific purposes and can’t be transferred to the CFI. The report noted that the Centre had promised to transfer it back to the GST Compensation Fund but whether it did it or not is not known. For one, the GST cess collection in FY20 was Rs 95,553 crore – almost the same as Rs 95,081 crore in FY19.
One more irony
Here is another irony.
In the midst of the pandemic lockdown of September 2020, the Centre was asked in Parliament to pay GST compensation from the CFI, instead of borrowing from the RBI, to pay states. Its reply was, there was no such provision in the business rules. But then, the 2020 CAG report had also pointed out that the Centre’s misappropriation of cess was not restricted to the GST cess but was widespread.
In all, the CAG report said, “out of the Rs 2,74,592 crore received from 35 Cesses, levies and other charges in 2018-19, only Rs 1,64,322 crore had been transferred to Reserve Funds/Boards” and the rest was retained in the CFI.
That is, 40 per cent of cess and surcharge was misappropriated by the Centre in FY19 alone. There are no more CAG reports to tell us if the misappropriations continue or not.
It should because the Centre has collected over Rs 6 lakh crore to pay Rs 2.7 lakh crore loan – and yet, the loan remains partly paid.
Here is yet another aspect of the Centre’s “cooperative federalism”.
Fiscal constraint or profligacy?
Finance Minister Nirmala Sitharaman had said at the GST Council meet in Goa in September 2019 that the Centre was facing fiscal constraints – without explaining why this was the case when it was boasting that India was the fastest growing major economy in the world at every opportunity and claiming that it had surpassed all the past governments in boosting growth.
There were two other developments at the time relevant in this context.
Weeks earlier, on August 26, 2019, the RBI declared that it would transfer surplus reserves of Rs 1.76 lakh crore – a “windfall gain” for the Centre. The RBI’s previous such transfer had peaked at mere Rs 0.66 lakh crore in FY15 and FY18.
Around the time the GST Council was meeting in Goa in September 2019, out of the blue, the Centre announced a massive corporate tax cut of Rs 1.45 lakh crore.
Corporate tax cut
As is now clear, the corporate tax cut didn’t lead to higher private capex and bled the exchequer. A Parliamentary panel said the exchequer lost Rs 2.28 lakh crore in FY20 (Rs 1.02 lakh crore) and FY21 (Rs 1.28 lakh crore). Corporate tax collections fell below that of personal income tax collection for the first in the 2011-12 GSP series in FY21, FY23, FY24 and FY25, and estimated to be so in FY26 (BE).
In short, the Centre misused its resources, indulged in profligacy even while refusing to pay to states their legitimate claims on the GST compensation.
Here is a secret none had an inkling of at the time. FY20 was heading for a pre-pandemic disaster.
The GDP growth would plunge to 3.9 per cent in FY20, from 6.5 per cent in FY19 and the growth in the Centre’s gross tax would plunge to (-)3.4 per cent, from 8.4 per cent in FY19.
Next Story