In the last week of November 2019, five opposition-ruled states issued a statement that suggested that slowing revenues from goods and services tax (GST) had begun to affect their finances. The Centre had delayed the release of compensation to the states, promised under the GST regime to any state whose annual revenue from the new tax failed to grow by more than 14 per cent.
The five states — Punjab, Kerala, Delhi, Rajasthan and West Bengal said in a joint statement: “The GST compensation for the month of August and September, required to be paid by the central government sometime in October, continues to be outstanding till date”. These states claimed that their fiscal situation had come under stress and some of them were already seeking recourse to “ways and means advances”, a special window of financing operated by the central bank.
By the end of the first week of December, more states had joined the chorus of demand for early release of GST compensation by the Centre.
There were now eight states (including Union Territories) — Chhattisgarh, Madhya Pradesh and Puducherry joined the earlier five — that stated that they would move the Supreme Court if the Centre did not agree to release the compensation arrears. That pressure seemed to have worked. Just a day before the GST Council was to hold its 38th meeting at New Delhi on December 18, the Centre released Rs 35,298 crore as pending GST compensation to the states.
That gesture helped meet a key demand of the states, suffering on account of slowing GST revenues as also the temporary halt to the release of compensation by the Centre. But the delay soured relations between the Centre and the states. At the 38th GST Council meeting, voting was forced for the first time to decide on the determination of a new rate of taxation for lotteries. In the past, all decisions at the GST Council were taken by consensus, even though a voting provision existed from the start.
This is clearly a reflection of the slowing GST revenues that have, of course, hit the Centre, but the states are equally worried because their revenue projections have gone awry. Collections of state GST or SGST have accounted for over 43 per cent of the states’ own tax revenues. Hence, any slowdown in SGST rings alarm bells for the states’ finances.
How serious is the situation for the states? In 2019-20, all the states and Union Territories had projected 11 per cent growth in SGST over the revised estimates of Rs 5.52 trillion in 2018-19. In the first eight months of 2019-20, total SGST collections are estimated at Rs 2.01 trillion, just about a third of the annual revenue target of Rs 6.13 trillion.
In other words, the states have to get ready for a significant shortfall in their SGST collections. In two-thirds of the current year, the revenues collected have only been one-third of the target. This is also why the states have been clamouring for the release of compensation. But compensation can help the states only for five years from 2017. What happens to the states’ revenues from 2022 onwards, if SGST revenues continue to maintain the current tepid growth?
A few of the states, however, cannot absolve themselves of any responsibility in landing themselves in the current fiscally difficult situation. As many as 14 states had projected an SGST revenue growth of over 14 per cent in 2019-20 (see table). The growth rates ranged between 14 and 27 per cent. What were the finance ministers of these states doing when they fixed their SGST revenue growth rates for the current year?
The Centre is, of course, guilty of having projected its revenue growth rates that were far in excess of what the economic growth scenario prevailing then could have justified. But these 14 states are no less guilty of putting out over-optimistic revenue projections in their respective budgets in February-March 2019, when economic growth had already begun decelerating. There is need for introspection by those states that had projected SGST collection growth rates, as high as 26 per cent by Kerala, 23 per cent by Rajasthan and 20 per cent each by Punjab and Madhya Pradesh. Remember that all these states are the ones that are also complaining the most.
Similar questions on the procedures used for projecting SGST revenue growth should be raised for those states that had estimated a decline in collections in 2019-20. These states included Uttarakhand, Goa, Assam, Haryana, Uttar Pradesh and Chhattisgarh. What were the arguments that propelled them to project a decline in SGST collections, while several other states could foresee a 25 or 27 per cent revenue growth rate? More importantly, it would be interesting to understand why states like Gujarat, Maharashtra, Telangana and Tamil Nadu projected SGST growth rates of 14-16 per cent. It is now time for the GST Council to look at all such issues in greater detail and present a status report.