The states look at more than Rs 1 lakh crore income gap after the withdrawal of GST compensation

NEW DELHI: states could be facing consolidation income gap up to Rs 1.23 lakh crore because of the withdrawal of compensation after the end of the five-year transition period of the GST on June 30, 2022, according to a report by the group of economic experts NIPFP .

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

If he GST Compensation is withdrawn after June 30, 2022, consolidated income gap of states would vary between Rs 1,00,700 crore to Rs 1,23,646 crore depending on expected tax buoyancy and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 have to generate an equivalent amount of income from existing sources to continue with the committed expenditures and/or reduce expenses to cope with the income crisis in 2022-23, he added.

Due to the ongoing shortfall in overall GST collection as well as rising income 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 the fall in the general collection of the state tax on goods and services (SGST) will have a substantial impact on the state finances of Punjab, Odisha, Goa, Chhattisgarh and Karnataka, among the main states.

Among minor states, substantial income 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 administers the fund.