Indian Finance Minister Nirmala Sitharaman. Photo: AFP

Just ahead of a Goods and Services Tax (GST) Council meet to be held on December 17-18 in New Delhi, Indian Finance Minister Nirmala Sitharaman tried to assuage the anger among the states over pending dues. She assured finance ministers of various states that the dues would be cleared, but did not provide a timeline.

Finance ministers from the states of Punjab, Kerala, Delhi, Rajasthan, Chhattisgarh and Madhya Pradesh met with Sitharaman on Wednesday and urged that funds held back since August be released as soon as possible.

Prior to the nationwide rollout of this indirect tax reform in August 2017, the federal government had assured the states that it would compensate them for reported revenue deficits on account of implementation of the new tax regime for five years. This compensation was to be released at the end of every two months. To raise the money, a compensation cess was also introduced as part of the new tax regime.

Punjab state Finance Minister Manpreet Singh Badal said, “Not only August-September, compensation is now due for another two months, October-November.… We can’t close jails, hospitals, social security pensions, schools, colleges, canals.

“States have a huge responsibility and compensation is part of law. [The] government of India is under obligation to pay,” he said after the meeting, Indian Express reports. The government of Punjab has even said it may take the matter to the Supreme Court if the dues are not cleared.

Delhi Deputy Chief Minister Manish Sisodia said Sitharaman did not specify the reason the compensation had been withheld. “At the time of [the] goods and services tax rollout, we were told that states [would] benefit, and that’s why states surrendered their tax rights with the [central government]. Center had guaranteed compensation at a particular growth rate. Now when states are asking for it, we are not being given [it],” he said.

Sisodia also pointed out that every state was facing this shortfall and not just those ruled by an opposition party.

The compensation due to states ruled by the opposition for the months of August and September is as follows: Rajasthan 44 billion rupees (US$677 million), Punjab 21 billion rupees, Delhi 23.55 billion rupees, Kerala 16 billion rupees, and West Bengal 15 billion rupees. GST revenues comprise nearly 60% of the tax revenues of states, and delays in getting the dues from the central government have put state budgets under strain.

The collections from the cess levied under the GST regime to compensate states for revenue losses have fallen short of the requirements in the current fiscal year on account of the economic slowdown. The government had budgeted for 6.6 trillion rupees in GST collections for the current 2019-20 financial year, of which it collected only about 50% in the first eight months. It had targeted 1.09 trillion rupees of compensation cess collections, of which it has so far collected 645.28 billion rupees.

In a related development, the federal government has written to all the states expressing concern that because of the lower GST collections, the compensation cess might not be enough to pay the states. The issue is expected to raise a lot of heat during the forthcoming GST Council meeting.

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