As per law, Centre has to protect a 14 percent growth in states' GST revenues. In case of shortfalls, states have to be compensated to the extent of the shortfall till June 2022.
On February 3, Kerala's Finance Minister Thomas Issac tweeted: "15th UFC, it is informally learnt, awarded Rs 74,000 crore as revenue deficit grant to states. In an unprecedented move, the Centre has slashed it down to Rs 30,000 crore. It is a serious blow to those states who suffered serious reduction in tax share because of population factor."
The statement once again brought to the fore the deteriorating relationship between the states and the Centre.
An economic slowdown has resulted in the Centre missing its tax revenue targets. This has in turn led to lower tax devolution to states in 2019-20.
The GST conundrum
For FY 2019-20, the share of states in gross tax revenues fell to Rs 6.56 lakh crore, from the budgeted target of Rs 8.09 lakh crore - a shortfall of Rs 1.53 lakh crore. In part the shortfall was due to higher transfer to states in 2018-19 and also because of Centre's lower tax collections.
Apart from tax collections messing up the fiscal math, the compensation cess distribution to states for the Goods and Services Tax (GST) has been a bone of contention between the Centre and states.
In the 38th GST Council Meeting held on December 18, non-BJP states had said the union government may be headed for a sovereign default as it had refused to assure them of paying on time the GST dues guaranteed to them through a Constitutional amendment.
Finance Minister Nirmala Sitharaman had told the Rajya Sabha on December 12 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.
In December, the central government had released Rs 35,298 crore as the pending compensation payment to states and Union territories for the August-September period.
Continuing the Centre versus states saga, in her Budget 2020-21 speech, Sitharaman said, "It is decided to transfer to the GST Compensation Fund balances due out of collection of the years 2016-17 and 2017-18, in two instalments. Hereinafter, transfers to the fund would be limited only to collection by way of GST compensation cess."
As per law, Centre has to protect a 14 percent growth in states' GST revenues. In case of shortfalls, states have to be compensated to the extent of the shortfall till June 2022. The GST Council made the provision for levies and compensation cess on certain items over and above the GST rate to compensate states.
The Sovereign, thus, cannot renege on its word to protect the revenues of states.
Finance Commission suggestions
The interim report submitted by 15th Finance Committee to the government will further strain the Centre-state relationship.
Among a various other things, the Finance Commission - a constitutionally mandated body - decides how taxes would be shared between the Centre and the states. Every five year, a new Finance Commission is formed, headed by a chairman and comprising four other members.
The Commission's terms of reference recommended, "the Commission shall use the population data of 2011 while making its recommendations".
The use of 2011 census has riled many states because it is believed that states that have worked on population control would lose out on benefits.
The choice of 2011 has resulted in states with larger populations like Uttar Pradesh and Bihar getting larger shares, while states that have worked to lower fertility rates and population control, have lost out.
The government has now more than halved the post-devolution revenue deficit grant for states, in keeping with the recommended by the Commission. The grant now stands at Rs 30,000 crore, down from Rs 74,340 crore, for the year 2020-21.
The post-devolution revenue deficit grants suggested by the 14th Finance Commission was a total of Rs 1,94,821 crore for 11 states during FY16-FY20. The Commission is yet to give its recommendations for the next five years.
But in the interim report it submitted in the Parliament on February 1, the Commission recommends post-devolution revenue deficit grants of Rs 74,340 crore for 14 states in 2020-21.
Out of the total revenue deficit grant, Rs 37,917 crore was assigned to Andhra Pradesh, Kerala, Punjab, Tamil Nadu and West Bengal, while Rs 36,423 crore has been set aside for Himachal Pradesh, Uttarakhand and seven North-East states.
But the government's allocation for states has been only Rs 30,000 crore in Budget 2020-21, much less than half of the recommended money.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
