Few states may need to be given GST compensation after June

Overall goods and services tax (GST) revenues are growing at a strong clip but the uneven growth registered by a few states probably indicates all is not well.

The government’s October-December GST data shows states such as Himachal Pradesh and Haryana clocked a 0-3 percent growth in revenues. Uttarakhand clocked a negative growth, while revenues of Bihar and West Bengal have fluctuated from 30 percent-plus growth to 6-10 percent growth levels during the said period.

Even for big states such as Rajasthan and Madhya Pradesh, the GST revenue trend has shown major fluctuations, probably indicating the collection trend has yet to stabilise fully.

Given this scenario, sources told CNBC-TV18 the government might be needed to extend GST compensation beyond June for a few states, especially the hilly ones. In their opinion, an arrangement may need to be worked out by the GST Council.

However, the constitution guarantees compensation for GST shortfall to all states and not a select few. Also, whichever state receives compensation after June, will eat into the revenue share of other states. Even widening the number of items for levying compensation cess or increasing the sin goods rate of 28 percent are not feasible options.

There is also the possibility of the GST compensation backlog stretching till July FY23 when the guaranteed support ends.

According to sources, an estimated backlog of Rs 30,000-40,000 crore may be carried over into the next fiscal year, given the previous year’s unpaid liabilities due to poor collections, compounding impact of 14 percent guarantee, and the fact that the Central government borrowed only Rs 1.10 lakh crore in FY21 to meet the compensation shortfall for states.

In the next fiscal year, the Centre will settle dues for February 2022 till June 2022. Budget 2022-23 allocated Rs 1.20 lakh crore as compensation cess. One lakh crore of this could be used to pay the compensation dues to states and the remaining may be used to service the back to back GST loans. Anything over the estimated Rs 1.40 lakh crore of compensation dues will be settled in FY24.