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GST losses: States want Finance Commission to recommend support for five more years

Though a general change in the GST Compensation Act isn't inside the FC&rsquos remit, a suggestion because it will give the required push towards the states' demand towards the GST Council.

Though a change in the GST Compensation Act is not within the FC’s remit, a recommendation by it would give the necessary push to the states’ demand to the GST Council.

States have attracted the 15th Finance Commission (FC) to recommend extending the timeframe that they'd be compensated as much as 14% revenue growth in case of a shortfall in GST collections. FE is familiar with that lots of states, that are uncertain concerning the trajectory of GST revenues, have requested for any further 5-year extension when the current period expires in FY22.

Bihar deputy chief minister Sushil Modi told FE, "We've posted a memorandum towards the Finance Commission to have an extension." He stated this will not impinge around the Centre's finances and can give a safety internet for states which should be compensated beyond FY22.

"Personally, i think that most states wouldn't need any compensation following the third year of GST (the present fiscal) as collection growth trend becomes more powerful as was the situation within the third year after states implemented the VAT regime," Modi added. Further, he noticed that while standalone GST growth is greater than average development in VAT collection for states over five years till GST, the benchmark of 14% growth was too ambitious and therefore compensation was required to stay in pressure for extended.

Though a general change in the GST Compensation Act isn't inside the FC's remit, a suggestion because of it will give the required push towards the states&rsquo demand towards the GST Council.

GST revenue collection for many states has proven a dual-digit growth (average monthly collection in FY 19 over FY 18), some bigger states&rsquo collection is gloomier than 14%. Among industrialized states, Maharashtra (12.5%), Gujarat (13.4%), Haryana (17%), Tamil Nadu (11.8%) and Karnataka (17.6%) have generally seen better growth under GST compared to the erstwhile VAT regime. Everything is better still for consuming states with Rajasthan (27.7%), Uttar Pradesh (22.1%), Bihar (51%) and Madhya Pradesh (32.1%) recording steep revenue collection increase.

Extension of GST compensation mechanism would also give some comfort to states as growth of the relation to reference (ToR) from the 15th FC recently established that the sources obtainable in the divisible pool from the central taxes may shrink when the Commission recommends that part of the pool be stored aside for defense and internal security purposes.