States face over Rs 1 trillion revenue gap post GST compensation withdrawal

States might be facing a consolidated revenue gap of up to Rs 1.23 trillion on account of withdrawal of compensation after the five-year GST transition period ends on June 30, 2022, says a report by economic think tank NIPFP.

At the time of implementation of the Goods and Services Tax (GST) on July 1, 2017, the Centre had promised to compensate states for loss of revenue for five years at an agreed formula.

"If the GST compensation is withdrawn after June 30, 2022, consolidated revenue gap of states would vary between Rs 1,00,700 crore to Rs 1,23,646 crore depending on expected tax buoyancy and reliability of data sources," the report said.

"This implies that states will need to either generate an equivalent amount of revenue from exiting sources to continue with committed expenditures and/or cut down expenditures to cope up with revenue shock in 2022-23," it added.

Due to the ongoing shortfall in overall GST collection as well as rising revenue gap between GST compensation requirement and GST compensation cess (GSTCC) mobilisation, timely release of GST compensation has become a matter of contention between the union and state governments.

The report said that the withdrawal of GST compensation and fall in overall State Goods and Services Tax (SGST) collection will have substantial impact on state finances of Punjab, Odisha, Goa, Chhattisgarh and Karnataka, among major states.

Among minor states, substantial revenue gap is expected for Himachal Pradesh, Uttarakhand, Tripura and Meghalaya.

Given the ongoing shortfall in GST collection and uncertainty associated with revenue on account of SGST collection, many states have approached the 15th Finance Commission for possible extension of the GST compensation period by another three years, i.e. up to 2024-25.

"Any shock to state finances due to withdrawal of GST compensation after the GST transition period may have profound impact on India's fiscal management and thereforemacroeconomic stability," the report noted.

It pointed out that even if the GST compensation period is extended beyond June 30, 2022, the Centre may not have adequate fiscal space to provide GST compensation to states at the ongoing annual growth rate of 14 per cent, unless either tax buoyancy and/or nominal growth rate of GDP improves.

To provide GST compensation to states, GST Compensation Cess (GSTCC) was introduced along with GST on some specific items to mobilise resources for the GST Compensation Fund.

The union government manages the fund.