Finance Ministers of several states met with the Union Finance Minister Nirmala Sitaraman just a day before the GST Council's 46th meeting on December 31, demanding that the GST compensation programme be extended beyond June 2022, when it is slated to expire.
Citing the impact of the COVID-19 pandemic on the overall economy and, more specifically, state revenues, states such as Tamil Nadu, Kerala, West Bengal, Rajasthan, and Chhattisgarh stressed that, while their revenues had been negatively impacted by the implementation of GST, the pandemic had pushed back any potential revenue recovery, especially at a time when they had been forced to spend significantly more to address the public health emergency and its severities.
The Constitution (One Hundred and First Amendment) Act of 2016 established the framework for levying a single national Goods and Services Tax (GST). States agreed to let the existing multiplicity of imposts be merged into the GST in exchange for practically all of their powers to impose local-level indirect taxes being revoked.
It was decided that states would receive the SGST (State GST) component of the GST as well as a share of the IGST (integrated GST), and any income fallout because of the new indirect tax regime would be made up from a pooled GST Compensation Fund for a five-year period ending in June 2022.
A compensating cess on so-called "demerit" goods is used to fund this corpus. The shortfall is calculated each year by projecting a revenue estimate based on 14 per cent compounded growth from the base year's revenue (2015-2016) and calculating the difference between that figure and the actual GST collections for that year.
The GST compensation scheme's deadline was specified in the original legislation, therefore to extend it, the GST Council must first propose it, and the Union government must then introduce a change to the GST statute that allows for a new date beyond the June 2022 deadline.
Surprisingly, the compensation cess will be levied well beyond the present fiscal year because the borrowings made in lieu of the compensation fund's deficiencies must be met.
The GST Council decided in September to prolong the compensation cess period to March 2026 "purely to repay the back-to-back loans taken between 2020-2021 and 2021-2022."
The Union government said on October 28 that the Ministry of Finance had released $44,000 crore to states and union territories "under the back-to-back loan facility in lieu of GST Compensation."
The total sum issued in the current financial year as back-to-back loan-in-lieu of GST compensation was 1,59,000 crore, it stated at the time, after taking into consideration preceding payouts totaling 1,15,000 crore.
The Centre stated that this amount was in addition to the regular GST compensation, which was "given every two months out of actual cess receipts" expected to be in excess of Rs 1 lakh crore. According to the announcement of the Union Ministry of Finance, "The entire value of 2.59 lakh crore is projected to exceed the GST compensation due in FY 2021-22."
The Finance Minister also stated that the decision by the Union government to borrow Rs. 1.59 lakh crore and release it to the States and UTs, which was made at the 43rd GST Council Meeting on May 25, 2021, was made to bridge the resource gap caused by the short release of compensation due to inadequate compensation accruing into the Compensation Fund.
With most States' finances having been significantly affected as a result of the pandemic and the economic recession that preceded the outbreak of COVID-19 in early 2020, state governments have grappled to find money to fulfil the necessary and additional spending required by the public health crisis.
Last week, Tamil Nadu Finance Minister Palanivel Thiaga Rajan stated that, with the States' revenues still recovering and a large revenue gap expected, the GST compensation period should be prolonged by at least two years beyond June 2022.
He emphasised that the States decided to give up their fiscal sovereignty in exchange of assurances from the Union government that their revenues would be protected when GST was implemented. But this didn't happen in the last five years; rather, a growing disparity between actual revenues realised and guaranteed protected revenues was witnessed.
Mr. Rajan had observed that the trend had been obvious even before the pandemic, but that the difference had worsened since then. Other states, including Kerala, Rajasthan, and Delhi, mirrored this sentiment, with the majority requesting a five-year extension.
For more on news and current affairs from around the world please visit Indiatimes News.