After a delay of over two months, the Centre on Monday released Rs. 35,298 crore as GST compensation to the states for the August-September period. The move comes two days before the GST Council meeting to be held here to discuss various issues, including the inadequacy of funds to compensate the states for a yawning revenue shortfall.

“The central government has released GST compensation of Rs. 35,298 crore to states and union territories today,” the Central Board of Indirect Taxes and Customs (CBIC) said in a Twitter post.

The finance ministers of seven states had met the Union finance minister Nirmala Sitharaman earlier this month over the delay in disbursal of funds and said that they were facing acute fiscal stress as a result. Sitharaman had assured them that payment would be made soon but didn’t cite any reasons for the delay.

When GST was rolled out on July 1, 2017, states were promised to be compensated for the loss of revenue. A 14% annual revenue growth is assured for states over the base year of 2016-17 level. The corpus for paying compensation is being created by levying cesses on top of GST rates on tobacco products, cigarettes, aerated water, automobiles, and coal.

Sitharaman had in the Rajya Sabha on December 12 stated that in 2017-18, the total cess collected was Rs. 62,596 crore, of which Rs. 41,146 crore was released to states. The remaining Rs. 15,000 crore was accumulated in the Cess Fund. In the next year, Rs. 95,081 crore was collected and Rs. 69,275 crore released to states but “cess accumulated in the Fund was zero”, she said.

Slowing economy, series of tax rate cuts and input tax credit frauds have impacted the GST revenue negatively. While the average monthly shortfall for states during April-September has been over Rs. 17,000 crore compared with the protected revenue of Rs. 55,900 crore, the compensation cess collection for the same period stood at Rs. 8,100 crore/month.

Although this suggests a much wider compensation shortfall of over Rs. 1 lakh crore for the full year, the actual shortfall is much less as integrated GST settlement are being done on ad hoc basis every two months. Although the details of such distribution isn’t in public domain, the indirect tax board had clarified that no unsettled IGST currently exists. This would mean that the compensation shortfall for FY20 could be around Rs. 30,000-35,000 crore. This would affect the Centre’s ability to pay states in the last quarter of the fiscal. #casansaar (Source - PTI, Financial Express)