States may need to cut spending by up to Rs 3.4 lakh cr due to GST shortfall this fiscal

ICRA has estimated that the gap between the GST compensation requirement and the cess collections is more than the government’s estimates.

States in India may have to significantly cut expenditure by as much as Rs 3.4 lakh crore in the current fiscal, notwithstanding the need to increase spending to support lives and livelihood amid the coronavirus pandemic. The fiscal deficit of states may rise up to 4.25 – 5.52 per cent of GSDP in FY21, curtailing their capital spending by Rs 1.0-3.4 lakh crore, considering shortfalls in GST and Central Tax Devolution (CTD), ICRA said. In the latest GST Council meeting, the Ministry of Finance pegged the GST compensation requirement of the state governments at Rs 3 lakh crore for the current fiscal, and the expected GST cess collections at Rs 65,000 crore, implying a gap of Rs 2.35 lakh crore.

In contrast, the rating agency ICRA has estimated that the gap between the GST compensation requirement and the cess collections is more than the government’s estimates. ICRA has pegged the gap at Rs 2.92 lakh crore, which is Rs 57,300 crore more than the government’s estimate of Rs 2.35 lakh crore. However, the government has offered two options to the state governments for bridging the gap, which varies in terms of the amount that can be borrowed, the source of borrowing, rate of interest on borrowings, payment of interest, charge on cess collected after the five-year GST transition period ends in July 2022, etc.

Meanwhile, the rating agency added that if people defer decisions to purchase motor vehicles and real estate, reflecting the mounting economic uncertainty by job losses and salary cuts in several sectors, it would curtail the revenues of the states from motor vehicle tax, stamps, and registrations. Also, the increase in the sales tax or VAT on petroleum products, or on excise duty rates on liquor by several states, may not be adequate to fully offset the impact of the expected reduction in consumption of various petroleum products as well as of liquor. Consequently, the aggregate sales tax and excise duty collections of the state governments, which together comprise around a fifth of their revenue receipts, could be significantly lower than the budgeted amount.