In its first admission of strain on tax collections and the Centre’s inability to compensate states for loss of revenue, the GST Council has written to states telling them that the GST and compensation cess collections in the last few months has become a “matter of concern” and that the compensation requirements are “unlikely to be met”.

The GST Council is a Constitutional body chaired by the Union Finance Minister and comprises the Minister of State for Finance/ Revenue and finance ministers of all states. It makes recommendations on all important issues related to the Goods and Services Tax.

The GST Council is now scheduled to meet on December 18 to focus on “revenue augmentation”. Some state finance ministers are scheduled to meet Union Finance Minister Nirmala Sitharaman on Wednesday to discuss the GST compensation dispute. “Hope Centre would concede what is due to states,” Kerala’s Finance Minister Thomas Isaac tweeted Tuesday.

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The Centre has already delayed compensating states for the shortfall in GST revenues for August-September, payment for which was due in October. At least five Opposition-ruled states/UTs - Kerala, West Bengal, Delhi, Rajasthan and Punjab, had issued a joint statement on November 20 raising concerns about this.

Explained

Backs to the wall

At a time when growth is faltering, the delays in paying compensation to states as guaranteed by the GST Act will make it more difficult for them to meet their own finances. As it is, a shortfall in Centre’s tax receipts hurts states more since the absolute amount they receive as per the devolution formula takes a hit.

As per the GST Act, states are guaranteed compensation for any revenue shortfall below 14 per cent growth (base year 2015-16) for the first five years ending 2022. GST compensation is paid every two months by the Centre to states.

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As per publicly available data with the Union finance ministry, the Centre had collected Rs 64,528 crore in compensation cess during April-November and paid out Rs 45,744 crore for April-July period, leaving Rs 18,784 crore in its kitty assuming no payment has yet been made to states for August-September. Officials said the payments were held back to states in anticipation of the shortfall in collections and the resultant impact on the government’s fiscal deficit.

The GST Council has now asked states to give their inputs and proposals regarding review of items under exemption, GST and compensation cess rates on various items, rate calibrations for inverted duty structure, compliance and revenue augmenting measures by December 6.

Given that cess is imposed only on luxury and sin goods under GST, any measure to generate more cess collections would either include imposing a higher cess on those items or a tinkering at the highest 28 per cent tax slab under the indirect tax regime.

Besides faltering indirect tax collections, the mop-up on the direct tax front is also not optimistic, with gross collections during April-November growing a mere 5 per cent to Rs 7 lakh crore. Net collections (less refunds) rose a meagre 0.7 per cent to Rs 5.5 lakh crore, as against last year’s 14 per cent and the Budget target of 17.3 per cent.

Corporate tax collections contracted 1 per cent during April-November, while personal income tax grew 5 per cent, a government official said.

Net direct tax collections have posted low growth because of a sharp 22.7 per cent rise in refunds during April 1-November 28 to Rs 1.46 lakh crore. The tax department processed 2.10 crore refund returns for the current assessment year 2019-20, a rise of 20 per cent, a CBDT official said.

The slowing stream of both direct and indirect tax collections poses a big challenge for the government to meet its tax receipt targets set in the Budget. Tax data made available by the Controller General of Accounts (CGA) for April-October shows that net direct tax collections had grown by around 3.5 per cent to Rs 5.18 lakh crore during the period. This would mean that gross tax revenue must grow 35.4 per cent during the remainder of the year.

This would be the second consecutive year when the government’s direct tax collections look out of reach. The government had missed the target in 2018-19 by Rs 63,000 crore. Last year, the government had initially estimated direct tax revenue at Rs 11.5 lakh crore, which was revised up to Rs 12 lakh crore. However, the actual direct tax receipts for 2018-19 were Rs 11.37 lakh crore.

Following the shortfall in direct tax revenue target for 2018-19, the government had reduced the tax targets for the current financial year. Direct tax revenue target has now been estimated at Rs 13.35 lakh crore for 2019-20, Rs 45,000 crore lower than the estimate of Rs 13.8 lakh crore in the Interim Budget presented in February.