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States get full GST compensation for 2019-20; but next year's payment remains a question mark

Under GST law, states are guaranteed to be paid for any loss of revenue in the first five years of the GST implementation from July 1, 2017. The shortfall is calculated assuming a 14 percent annual growth in GST collections by states over the base year of 2015-16.

July 28, 2020 / 06:22 PM IST

While the Centre has paid the Goods and Services Tax (GST) compensation amount that it owed to the state governments for FY 2019-20 in its entirety, it is not the end of woes for states facing financial stress.

On July 27, the central government released more than Rs 1.65 lakh crore as GST compensation to states for 2019-20 financial year, including Rs 13,806 crore for March. The total amount of compensation released for 2019-20 is Rs 1.65 lakh crore, whereas the amount of cess collected during the year was Rs 95,444 crore.

“GST compensation represents the Centre’s compensation to the state governments due to loss of revenue on account of subsuming of earlier state taxes. One cannot ignore the harsh reality that the GST collections for Q1 of 2020-21 have hit us hard and collections are down about 41 percent compared to last fiscal," Mahesh Jaising, partner, Deloitte India, said.

Under GST law, states were guaranteed to be paid for any loss of revenue in the first five years of the GST implementation from July 1, 2017. The shortfall is calculated assuming a 14
percent annual growth in GST collections by states over the base year of 2015-16. States are promised compensation for any revenue shortfall till 2022, in case they go below the 14

percent annual growth since the GST rollout in 2017.

"While the Centre has released the entire compensation for 2019-20, it certainly isn’t an end to the states’ financial woes, given the sharp dip in collections. If Q1 is any indication, 2020-21 would be difficult year as the consumer sentiment is dipping due to the COVID-19 pandemic," Jaising observed.


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Though states can now utilise these funds for implementing measures towards reviving the economic activity and other social welfare schemes, the larger question on how to continue compensating the states still needs redressal.

"The bigger challenge for the central government will be to compensate the states during the current financial year since the GST revenue has witnessed a sharp decline due to the pandemic. It will be interesting to see what methodology the Centre adopts to fulfil its compensation commitment towards the states,” Rajat Bose, partner, Shardul Amarchand Mangaldas & Co said.

Finance Minister Nirmala Sitharaman said the Centre would be looking into the legality of GST Council borrowing from market to meet the compensation requirements. It is one of the solutions that have been discussed in the GST Council. However, the legal provisions for the same have to be ascertained.
Kamalika Ghosh
first published: Jul 28, 2020 06:21 pm
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