The finance ministry is not in favour of raising the goods and services tax (GST) rates even on non-essential items at a time its revenue collections are expected to be badly hit by the nationwide lockdown to contain the spread of Covid-19. “Post the lockdown, demand has to be induced and economic activity has to improve on all fronts, not just on essential items.
Who are we to decide what is non-essential? However, the GST Council will take a final call on the matter,” said a senior finance ministry official, seeking anonymity. The GST Council meeting is likely to be convened in June, said the official. The government has eased restrictions in the fourth phase of the lockdown, which is scheduled to end on May 31 and allowed businesses to restart operations. However, the more than two-month lockdown and the reverse migration of workers from urban and industrial centres to rural areas have crippled economic activity.
The Council is also likely to take up the issue of compensating states for their revenue shortfall by borrowing from the market. Under the GST (Compensation to States) Act, 2017, the level of protected revenues of the state governments is calculated on the basis of a 14% annual growth rate with FY16 as the base year. The gap between the state governments’ actual SGST (state goods and services tax) collections and the protected revenues is required to be released by the Centre in the form of GST compensation for the first five years of the GST regime. Icra Ltd has estimated that out of ?1.7 lakh crore compensation requirements in FY20, ?1.2 lakh crore was released by the Centre in FY20, leaving an unpaid balance of ?50,500 crore at the end of March. Jayanta Roy, group head, corporate sector ratings, Icra, said with the covid-19 pandemic and associated lockdown being expected to shrink non-essential consumption, state government finances will undergo a dual shock.
“First, the SGST collections would contract by 30% in FY21 to ?3.5 lakh crore, which entails a spike in the compensation requirement to ?4.1 lakh crore based on Icra’s assessment. Simultaneously, the cess collections that are meant to be funnelled towards GST compensation will dry up in the current environment. Accordingly, the risk associated with the magnitude and timing of the release of the GST compensation by the Centre to state governments has escalated sharply and would exacerbate the fiscal and liquidity stress that the states are experiencing due to the crisis.”
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