Last week, the GST Council weighed the option of the council resorting to market borrowings under sovereign guarantee and decided to hold a one-agenda meeting in this regard in July.

Despite the recent release of Rs 36,500 crore by the Centre from the integrated GST pool, the state governments will require to be paid a whopping Rs 80,000 crore more as compensation for their State Goods and Service Tax (S-GST) shortfall in the March-May period, going by the formula of 14% assured annual revenue growth.

What has inflated the compensation requirement is a sharp fall in revenue in April-May due to the Covid lockdown: the gross GST collections shortfall during the two month was over 50%. Given that the monthly protected S-GST revenue under the compensation mechanism is Rs 63,700 crore for FY21, the shortfall in the state’s revenue in the first two months of this fiscal is roughly the same, if not slightly higher. Add another Rs 13,000 crore of unpaid S-GST compensation dues for March and the states’ claims for the March-May period approaches the Rs 80,000-crore mark.

For perspective, the compensation cess proceeds in the whole of FY20 were nearly Rs 96,000 crore.

The release of floating I-GST funds cleared states’ compensation bills up to February this year.

S-GST shortfall on a monthly average basis was Rs 12,583 crore in FY20, Rs 5,773 crore in FY19 and Rs 4,571 crore in FY18 (last nine months). The compensation kitty was in surplus in FY18 (Rs 21,465 crore) and FY19 (Rs 25,806 crore), while FY20 witnessed the designated cess funds falling short of the requirement (by Rs 46,000 crore).

Clearly, the gap is set to widen sharply in the current fiscal as the government revenues in general have taken a big hit due to the lockdown. In fact, a slippage in GST compliance level (read tax evasion) due to the absence of a system of full-fledged returns that allows meaningful invoices matching and the decline in the aggregate tax rate to level below the revenue neutral rate also prevented the collections from rising to the anticipated levels.

Among the ways out of the imbroglio are the states reconciling to the fact that the so-called protected revenue is too tall an order for the Centre to ensure now and be content with the actual cess funds collected. Alternatively, a mechanism could be evolved to find the necessary additional resources for the compensation. Last week, the GST Council weighed the option of the council resorting to market borrowings under sovereign guarantee and decided to hold a one-agenda meeting in this regard in July.

The liquidity problems being faced by the states on account of the uncompensated S-GST shortfall and decline in other ‘own revenues’ are partly addressed by the unmitigated tax devolution by the Centre. Notwithstanding steep decline in actual tax collections, the Centre released Rs 92,076 crore in April-May as their share in the divisible pool of taxes, sticking to the FY21 Budget estimate (BE). In fact, tax devolution to states in April-May was 200% of the actual collection of taxes by the Centre during the period. Also, the states’ borrowing space for FY21 has been widened by Rs 4.28 lakh crore to Rs 10.61 lakh crore.