Punjab likely to lose Rs 15K crore in FY23 as GST compensation ends

At the Council meeting in Chandigarh, states may call for extending compensation deadline

A day ahead of the Goods and Services (GST) Council meeting, Punjab has estimated that its loss from the end of the compensation regime would be Rs 14,000-15,000 crore during the current fiscal year.  

The two-day meeting of Union and state finance ministers will be held in Chandigarh from Tuesday.

“As the GST compensation regime is ending in June 2022, the state government would be staring down a big hole left in its finances to the tune of Rs 14,000-15,000 crore in FY23,” Punjab finance minister Harpal Singh Cheema said in his Budget speech on Monday.

He termed it a “fall off the cliff” scenario for the state.

To give it a perspective, the loss at the lower end comprises 14.7 per cent of the total projected revenue receipts of Punjab during FY23. The figure is 15.7 per cent at the upper end.

“GST compensation has formed a large portion of the revenue receipts of Punjab as it gave up various taxes related to agriculture when it entered the GST regime,” ICRA chief economist Aditi Nayar said.

That is why the state’s GST compensation has been large in absolute terms and proportionately much larger than other states when compared with revenues, she said.

However, the state Budget projected GST revenues to rise by around 27 per cent at Rs 20,550 crore during the current fiscal year against Rs 16,200 crore pegged in the revised estimates of the previous year.

“Efforts are already on to plug loopholes in GST collections. I expect a buoyancy of about 27 per cent in GST collections in FY23. This would add around Rs 4,350 crore to the state kitty,” the state finance minister said.

While Cheema blamed the previous government for not planning in advance to make up for the revenue loss after the GST compensation deadline ends, states are likely to raise the demand of extending the compensation period at the Council meeting.  

“It will not be amiss to say that lack of planning has put the state in a compromising situation,” the Punjab finance minister said.

GST laws have guaranteed the states 14 per cent growth in revenues from taxes subsumed into the new indirect tax on the base year of 2015-16 for the full five years.

For this purpose, compensation cess was imposed on luxury and sin goods such as cigarettes, aerated drinks and big cars over the peak rate of 28 per cent.
 

The Centre has extended the duration of the cess by around four years. It would be used to repay the borrowings made to compensate the states after Covid-induced lockdowns pulled down their GST revenues as well as compensation kitty.

After delaying compensation to the states due to low collections in the kitty, the Centre had cleared all the dues till May 2022.

It had released Rs 86,912 crore to the states last month. Of this, 5,890 crore was given to Punjab alone.

Recent data by the GST Council showed that Punjab was the second state after Puducherry that had the highest shortfall in GST revenues in the last two years.

For Punjab, it stood at a high of 48.8 per cent during FY22, though lower than 57.7 per cent a year earlier.

As states may seek extension of the compensation deadline, Chhattisgarh commercial tax (GST) minister T S Singh Deo had told Business Standard that with the economy not picking up as anticipated, there is no option but to demand an extension of compensation deadline for at least five more years.

He had said the GST Council came into existence only on the understanding that the states’ 14 per cent revenue growth would be protected.