GST compensation: Why 5 states are considering legal action against the Centre

Kerala, Delhi, Rajasthan, Punjab and West Bengal – all non-BJP states- have alleged that the Union government has delayed GST compensation.

Money GST

Five states in the country are considering legal action against the Union government over delay in GST compensation, which is supposed to be paid to them on a bi-monthly basis. Kerala state Finance Minister Thomas Isaac has said that he is consulting with his legal department.

At a time when state governments are facing financial pressure due to fall in revenue collections amid economic slowdown, five state governments have urged the government to pay their pending GST compensation. Finance Ministers of Kerala, West Bengal, Delhi, Rajasthan and Punjab, which are all-non BJP states, say that GST compensation for the months of August and September, required to be paid by the Central Government sometime in October, continues to be outstanding till date.

The Finance Ministers of these five states, who met at the meeting of the Empowered Committee of State FMs said in a joint statement that no explanation whatsoever has been furnished for this delay of nearly one month. “As a result, states are facing acute pressure on fiscal, some already resorting to ways and means or even overdrafts.”

What is the GST compensation?

In November 2016, the Union government announced the draft GST compensation law as per which states would receive provisional compensation from the Centre for loss of revenue from implementation of GST every quarter. This is paid to the state governments on a bi-monthly basis.

The government said that the compensation would be met through levy of a cess called ‘GST Compensation Cess’ on luxury items and ‘sin goods’ like tobacco, for the first five years.

However, the final annual number would be decided after an audit carried out by the Comptroller and Auditor General, it said at the time.

The loss of revenue to a state is calculated as the difference between the actual realisation to a state under GST regime and the tax revenue it would have got under the old indirect tax regime after considering a 14% increase over the base year of 2015-16.

Why this matters to states?

As per a Business Standard report, Kerala’s outstanding compensation amounts to Rs 1,600 crore, while Rajasthan is owed Rs 4,400 crore, Punjab Rs 2,100 crore, Delhi Rs 2,355 crore, and West Bengal Rs 1,500 crore.

GST compensation is considered an important source of funds for state government. This is because GST comprises nearly 60% of the tax revenues of states.

In the joint statement, these states said that many of them are already facing deficits up to 50% of the total GST. Such huge deficits, they say, have the potential to disrupt the budget and planning processes in a host of areas and could potentially bring activities of the states to a grinding halt.

Kerala Finance Minister Thomas Isaac told TNM that the state cannot manage without compensation coming in. “Many states are struggling. Kerala is in overdraft. Because of the slowdown, tax revenues have also come down. Our borrowing power too, has been cut. So Kerala finds it impossible to manage,” he adds.

The states say that many were apprehensive about not receiving compensation without interruption. And it was on the assurance of GST compensation that states agreed to join GST.

States appeal to FM

Finance Ministers of the five states have appealed to Union Finance Minister Nirmala Sitharaman to look into the matter personally and release the compensation without further delay.

They also suggested that the matter be placed on the agenda of the next meeting of the GST Council and a healthy mechanism be put in place to ensure compensation is released to states with due urgency and judiciousness.

“The current delay has shaken the confidence of the states who have so far supported GST in a spirt of rare bonhomie. Despite many challenges from time-to-time states have extended their support to all major decisions of the GSTC,” they said in the joint statement.