Indian Finance Minister Nirmala Sitharaman. Photo: AFP

When the ruling Bharatiya Janata Party government passed the goods and services tax, it was supposed to be a historic change. India finally achieved its ideal of “one nation, one tax.”

But now, several years after passage, the GST is delivering far below projected earnings, blowing a massive hole in budgets across states.

The shortfall in GST has put many states in tight spots as they are finding it difficult to make both ends meet with the central government unable to make timely payments. Five opposition-ruled states have expressed concern over this delay for the August-September period.

This also creates problems for the projections of the fiscal year 2019-20. The federal budget had projected fairly high numbers from the GST collections to reduce its fiscal deficit. But with collections continuing to falling short, the deficit will grow and restrict the Narendra Modi government’s ability to spend towards welfare projects.

The complaining states – Punjab, Kerala, Delhi, Rajasthan and West Bengal – said in a joint statement: “The GST compensation for the month of August and September, required to be paid by the central government sometime in October, continues to be outstanding.”

The states, banded together as the Empowered Committee of States’ Finance Ministers, met in New Delhi on Wednesday and alleged that no explanation has been offered for the delay. “As a result, the states are facing acute pressure on their fiscals; some are already resorting to other ‘ways and means’ or even overdrafts,” the statement added.

The states wanted Finance Minister Nirmala Sitharaman to look into the matter personally and release the compensation without any further delay. They suggested that the matter be placed on the agenda of the next meeting of the GST Council and a healthy mechanism be evolved to provide compensation with “due urgency and judiciousness.”

“GST comprises nearly 60% of the tax revenues of states,” the joint statement said. “Many states are already facing deficits up to 50% of the total GST. Such huge deficits have the potential to disrupt the budget and planning processes in a host of areas literally bringing activities of the states to a grinding halt.”

West Bengal Finance Minister Amit Mitra said, “We thought we will make appeal to the union finance minister saying that she must personally look into this and not violate the constitutional provisions as passed by the parliament of India.” All the states are in distress if the compensation due to them is not given, he said.

“It is a dangerous situation, there is no precedent before,” he said, underlining that this is the first time in history that there has been a delay. “States have not received GST compensation for August and September, which is against the constitutional amendment where it was stated clearly that states when they fall below 14% rate of growth of their GST [revenue], they will get compensation by the center,” he said. As far as West Bengal is concerned, the pending amount stands at 15 billion rupees (US$209 million), he said.

Kerala Finance Minister Thomas Isaac said his state was supposed to get 16 billion rupees ($223 million). Kerala is “under overdraft for almost one week now,” he said. “This is  a center-engineered crisis in the state finance. It has never happened in the history of India. Something drastic has to be done.”

Punjab is also under threat of overdraft if the dues are not released immediately, state Finance Minister Manpreet Singh Badal said. Punjab is awaiting 21 billion rupees as compensation, while arrears stand at 20 billion rupees ($279 million), Badal said.

Echoing similar concerns, Delhi Deputy Chief Minister Manish Sisodia said that, due to delay in payment, finances of states are under pressure. The GST compensation due to Delhi is 23.55 billion rupees ($328 million).

Following introduction of the GST, the center assured the States, through legislation, that any revenue shortfall would be compensated fully for the first five years. For the purpose of calculating the compensation amount in any financial year, 2015-16 was assumed to be the base year.

The states also reminded the center that assurance of GST compensation was a necessary enabler in states’ agreement to subsume their fiscal sovereignty into GST.

The center is facing a tough time as the GST compensation Fund is under stress. This happened due to lower-than-expected collection of GST. The gross GST revenue collected in October was 954 billion rupees ($13.3 billion), which was 5.29% lower than in October 2018. The government expects average monthly collection to be over one trillion rupees. However, this year only three of seven months saw such a collection.

Meanwhile India’s peak festival season did little to lift economic activity last month, suggesting growth is in for yet another quarter of slowdown. Car sales fell 6.3% in October from last year, according to data released by the Society of Indian Automobile Manufacturers. Two-wheeler sales were down 14.4% from a year earlier while demand for trucks and buses were down 23.3%.

India’s factory output shrank by 4.3% to the lowest level in eight years in September, weighed down by a sharp fall in capital goods production. It’s likely that industrial production might struggle more in the coming months.

Amid this bleak scenario the government is looking to sell some of the state-owned enterprises and has set an ambitious target of selling one trillion rupees worth of assets this year.

The union cabinet on Wednesday approved sale of the government’s stake in five such companies, including Bharat Petroleum Corp Ltd, Shipping Corp of India and Container Corp of India along with transfer of management control. It is also looking for a buyer for the state-owned carrier Air India.

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