GST Compensation Plan

GS-2 & GS-3, Polity & Economy-Issues and Challenges Pertaining to the Federal Structure, Mobilization of Resources

Introduction

          The GST council meeting has been deferred  sharp differences arisen due to the huge revenue shortfall experienced by both Centre and States.Now the Centre is trying to go back on its claims of reimbursing the states.

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  • Producing States such as Gujarat were sceptical because GST is a destination based tax which is collected proportionately more in consuming States such as Bihar.
  • States were lured by the promise of 14% annual growth in GST revenue over the base year of 2015-16.

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Centre’s plan:

  1. states could borrow 97,000 crore (the shortfall in the GST revenue compensation) from the Reserve Bank of India (RBI) under a special window at a low rate of interest.
  2. Or the states could borrow 2.35-lakh crore(the total compensation shortfall) from the market with the RBI facilitating it.
  • Centre assured that the burden of repayment would be borne by the future collections from the compensation cess.
  • was proposed that this cess which was to end in June 2022 could be extended to facilitate the repayment of the debt.

Growth trends:

  • Corporate sector profits will fall sharply.
  • Fast-moving consumer goods, and e-commerce will do well.
  • Companies in sectors(airlines, hotels and consumer durables will show losses)

Results:

  • Corporation tax collection will fall sharply-more than 20% compared to the budget estimate.
  • Income tax collection will fall since a large number of workers have lost employment and have faced salary cuts.(more than 20%.)
  • GST collection will also be short by much more than 20%.
    • The production of luxury and sin goods-impacted and they pay the high rate(18%, 28% and cess on top.)
    • essential production which is affected less(0%, 5% or 12%.)
  • Due to a drastic fall in imports, the Integrated Goods and Services Tax (IGST) and customs duties will also decline.
  • Extra tax collected on petroleum products will help counter the decline to an extent.

Data on Centre’s borrowing offer for states:

Direct Taxes

  • If GDP falls by 10% over last year it will be about ₹184-lakh crore.(short of 5 lakh crore)
  • The States’ share of all taxes collected by the Centre is 42%(short of 2 lakh crore)

Indirect Taxes

  • Indirect tax/GDP ratio can be expected to fall from 10.5% to 8% ( short of ₹7 lakh crore.)
  • 60% loss will be from GST and half of that would be the loss of States.
  • 1.4 lakh crore will also be a loss of States.

All these add up to 6.4 lakh crore

Conclusion

         Even the figures mentioned in the Centre’s plan have not been accepted by the states. The condition of the economy suggest a higher shortfall than the figures that Centre has used to calculate the borrowing amount.

          If the fall is further downwards, it will be a precarious shortfall. The Centre with more borrowing power, thus, needs to do the borrowing.

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