Shortfall estimated at Rs 2.7 trn; Rs 1.1 trn may be met via cess collection
Compensation cess is levied on a few items in the 28 per cent slab, such as automobiles, cigarettes, and aerated drinks
The Union government has proposed market borrowing of Rs 1.58 trillion in the current fiscal year (FY22) to compensate states for the goods and services tax (GST) revenue shortfall in view of inadequate cess collection this year. This will be the second straight year of additional borrowing as the Covid-19 pandemic extends into 2021. The Centre has pegged the GST compensation requirement at Rs 2.7 trillion for FY22, of which Rs 1.1 trillion is expected to be met through cess collection. Like last year, a revenue growth of 7 per cent has been assumed to forecast the shortfall and borrowing requirement.
These estimates will be put before the GST Council on Friday for a decision on whether the borrowing arrangement of last year involving back-to-back loans to states can be extended to the current year as well.
“While the GST revenues may see a recovery in FY22, there will still be a gap between the compensation requirement and the compensation cess available… if the Council decides to extend the same borrowing arrangement on the same principles as last year, a borrowing of close to Rs 1.6 trillion can be opted for,” said a government official. “But it all boils down to what the states feel about this,” he added.
The Centre is expecting GST collection to fall below the Rs 1-trillion mark in June, as indicated by the slowdown in e-way bill generation in May. After GST implementation in July 2017, states were promised compensation for five years for any revenue shortfall, assuming a 14 per cent annual growth rate, since states lost autonomy over indirect taxes.
Compensation cess is levied on a few items in the 28 per cent slab, such as automobiles, cigarettes, and aerated drinks.
While the Budget for 2021-22 has estimated GST revenues to grow 17 per cent over last year, the target appears challenging, given how the localised lockdowns across the country have impacted supplies.
A government official pointed out that a 17 per cent growth translates into an average monthly gross GST revenue of Rs 1.1 trillion. “We have overestimated the compensation requirement for FY22.
We expect the actual requirement to be much lower. But in that case, one can use the excess borrowed amount to partially make up for the previous year’s gap,” he said.
Last year, the Centre had estimated a cess shortfall of Rs 2.35 trillion for 2020-21, of which Rs 1.1 trillion attributed to GST implementation was met by borrowing. Another Rs 70,000 crore came by way of cess collection, leaving a gap of around Rs 50,000 crore (attributed to Covid-19), which will be paid to the states in due course. Some Rs 1.1 trillion was borrowed by the Centre and passed on to the states as back-to-back loans. The Centre had proposed two options to the states to address the compensation cess shortfall.
Either borrow Rs 1.1 trillion where the interest cost will be paid off through the extended cess period or borrow the entire Rs 2.35 trillion where cess will be used for paying only the principal, not the interest.
Under the first option, the states were additionally allowed to borrow by 0.5 per cent of their respective economic size from the markets.