The government estimates a shortfall of Rs 2.7 lakh crore in collections of compensation cess for 2021-22, according to a senior Finance Ministry official, who spoke to BloombergQuint on condition of anonymity. The compensation cess is to be paid out by the central government to states as per an agreement signed at the time of implementation of the Goods and Services Tax.
The GST Council, which meets on Friday for the first time in nearly seven months, is likely to discuss the potential shortfall in GST compensation cess. Ahead of that, the centre has made its own assessment, which will now be circulated across states. Some part of the shortfall, but not all of it, is likely to be met through borrowings.
The council meets against the backdrop of the second wave of the pandemic which threatens to impact the economy and, in turn, central and state government revenues.
According to the official quoted above, the estimated shortfall in compensation cess collection is not entirely a reflection of the state of government revenues. It also reflects the 14% compounded growth in indirect tax revenues promised to states as part of the GST agreement.
This is the second year that a shortfall in compensation cess collections has emerged.
In 2020-21, when a shortfall of Rs 2.35 lakh crore arose, the centre partly compensated states by borrowing Rs 1.10 lakh crore through a special window and transferring it to states as back-to-back loans. The council also agreed to extend the period for which the cess would be imposed beyond the five years originally planned. The decision came after much back and forth.
The council, at its meeting, will also discuss the mechanism of borrowing to meet the shortfall in FY22.
The government will consider whether a mechanism similar to last year is required, said a second Finance Ministry official. In FY21, the central government borrowed 3-5 year funds from the market and passed them on as back-to-back loans to states. The average rate at which we were able to borrow under the special window was 5% or less than that, this official said.
The government estimated shortfall is higher than expected.
Devendra Kumar Pant, chief economist at India Ratings and Research, estimated the government may be looking at a compensation cess shortfall of close to Rs 2 lakh crore in the current financial year.
“GST collection has been above Rs 1 lakh crore for the past seven months but the major reason for that was steps taken to correct compliance issues and the current growth buoyancy may taper off in the second-half of the year,” Pant said. He added that the impact of the second wave and any third wave of infections remains uncertain.