How the shortfall in GST revenues can be bridged?

In its 40th GST Council Meet, Union Corporate Affairs and Finance Minister, Nirmala Sitaraman announced a meeting to be held in the month of July 2020 to discuss compensation to States. The States have been knocking heads with the Centre for delayed compensation payment since the implementation of the Goods and Services Tax.

Just a few days before the 40th Goods and Services Tax Council Meet, the Centre released compensation to states amounting to ₹36,400 crores that was due for the months of December 2029 to February 2020. This GST compensation came in after the compensation of ₹1.15 trillion for the period of April-November 2019 was released.

As per laws provisioned under the Goods and Services Tax framework, if a states' GST revenue does not grow by at least 14% over the base year of 2014-15, the Centre pays them the difference on a bi-monthly basis for the first five years of GST implementation. This shortfall is calculated assuming a 14% annual growth in GST collections by States over the base year of 2015-16. The Centre has already conveyed its inability to pay the compensation on time due to shortfall in cess and the meeting in July is likely to focus on whether the Centre should borrow to compensate States and more importantly, if funds are borrowed, who must pay them back.

But even as the Centre prepares to discuss compensation to States in July, one can’t help wonder if there are alternative routes to bridge the shortfall in GST revenues.

Expand the GST purview
Certain commodities were left out of the purview of the Goods and Services Tax when the indirect tax reform was first introduced in India. Instead of rate cuts, commodities like crude oil, natural gas, petrol, diesel and aviation turbine fuel could be brought under the purview of the Goods and Services Tax allowing a central and uniform tax rate (currently under VAT) which will inevitably lead to a significant increase in revenue. Health bodies have also recommended that a Corona cess be levied on the sale of products that are likely to make the consumer more vulnerable to contracting the Coronavirus viz. tobacco based products like cigarettes and bidis.

Tax on exports
While the demand for rate cuts is not new, the Centre and States are well aware that rate cuts don’t do much to bridge the shortfall in GST collections. This is probably why experts have recommended that the GST council look into bringing more taxpayers under their radar - like the export sector. At present, goods and services exporters receive exemptions on GST with a letter of undertaking. They also receive a refund of taxes paid on their inputs - simply put, the Centre or States don’t receive anything from exporters but end up funding them. One might argue that these exemptions are necessary to keep the number of exports up, but the fact remains that a lot of amendments have been made to ideal scenarios and happy paths because of the Coronavirus pandemic and consequent lockdown. Even if India’s exports accounted for a number as low as ₹400 billion, a mere 2% levy can account to a whopping ₹8 billion in India’s treasury. If the States cannot be given equal compensation, the Centre could perhaps look at compensating States based on the ratio of exports from that State.

Since the Centre has released compensation to States only a few days ago, they are highly unlikely to release any more funds in the near future. Alternative routes like expanding the purview of the Goods and Services Tax and bringing existing categories of taxpayers like exporters under the GST net seems like an ideal solution during the Coronavirus pandemic and economic crisis.