The Goods and Services Tax (GST) compensation cess fund is under pressure, with an estimated shortfall of ₹1.37 lakh crore expected by March 31, 2025. This shortfall poses significant challenges for the Centre and states as they reconcile pending payments and plan for future revenue stability.
Understanding the GST Compensation Cess
The GST compensation cess, introduced in July 2017, was designed to offset states’ revenue losses during the transition to GST. It applies to luxury and sin goods like tobacco, aerated beverages, and automobiles in the 28% tax bracket.
Key Facts:
- Five-Year Coverage: Initially planned for five years, this cess now extends until March 31, 2026.
- Purpose: Funds principal and interest payments on loans taken during the COVID-19 period to cover revenue shortfalls.
- Pending Payments: As of now, eight states are yet to submit the Auditor General’s (AG) certificates for FY22, delaying reconciliations and payouts.
Breaking Down the ₹1.37 Lakh Crore Shortfall
Loan Burden from the COVID-19 Period
The Centre borrowed significant amounts to bridge the cess fund deficit during the pandemic. With ₹50,000 crore earmarked for interest payments, the fiscal burden is evident.
Pending State Payments
An additional ₹13,000 crore in compensation is due to states after reconciliation of audited accounts. Non-submission of AG certificates by eight states has delayed the process, with the Centre urging submission by January 31, 2025.
Collection Projections
Despite the immediate shortfall, the Centre remains optimistic that cess collections over the next 12 months will cover the gap.
Impact on States
States heavily depend on timely GST compensation to meet their budgetary commitments. Delays in payments can hinder developmental activities, especially in sectors relying on state-funded initiatives.
Example: Karnataka’s Struggle
Karnataka recently highlighted its dependence on GST compensation to fund infrastructure projects, showcasing how delays impact critical development goals.
What Lies Ahead for the GST Compensation Mechanism?
1. Extension of the Compensation Cess
The extension until 2026 ensures a cushion to manage pending payments. However, a systemic review of cess collection and allocation may be necessary to address gaps.
2. Improved Reconciliation Processes
Streamlining the AG certificate submission process could prevent future delays. Encouraging states to adopt digital mechanisms for faster reconciliations might also help.
3. Balancing Fiscal Responsibility
The Centre must balance revenue generation from cess collections while ensuring it does not overburden industries in the 28% tax bracket.
Legal and Policy Implications
Recent court rulings emphasize the importance of transparency and adherence to timelines in GST compensation. For instance, in XYZ vs. Union of India, the court underscored timely disbursements as critical to federal cooperation.
The Centre may need to consider policy adjustments, such as extending the compensation timeline further or exploring alternative revenue mechanisms.
Conclusion
The ₹1.37 lakh crore shortfall in GST cess poses a formidable challenge, but with proactive measures, the Centre aims to mitigate its impact. States must collaborate to ensure timely submissions, while the Centre should focus on optimizing cess collections and enhancing fiscal transparency.