Will Pay GST Arrears Despite Losses Due To "Act Of God": Centre To States

The centre in a letter to the states has promised it would clear their goods and services tax (GST) dues despite the massive shortfall in GST cess collection amid the coronavirus pandemic, a situation that has been described as "an act of God" by Finance Minister Nirmala Sitharaman. The government in the letter said it wants to stay clear of "avoidable borrowing at the central level when it could be done at the state level" as central revenues are under "great strain" due to the pandemic.

The Union Finance Secretary and the Expenditure Secretary will hold an online meeting on September 1 to answer queries of the states on two options that the centre has proposed - the first being states won't have to service debt or repay it from other sources, and the second being states won't have to repay the principal amount from any other sources.

"The government of India stands by the statement of (former Finance Minister) Shri (Arun) Jaitley and is actively working with the states to work out such an arrangement. The government of India will support extension of the compensation cess for such period as may be necessary to completely discharge any arrears of compensation," the centre said in the letter.

The GST Council, which makes national tax policies, after a meeting on August 27 had given the two options and asked the states to take a decision within a week.

The centre is hard-pressed on paying GST dues to the states that have not earned much this year due to months of lockdown necessitated by the COVID-19 crisis. Punjab, for example, has said it may see a revenue deficit of Rs 25,000 crore this year. Haryana has also complained that it used to get the maximum revenue from taxes before the GST was introduced in July 2017.

"The prevailing economic situation is such that central revenues are under greater strain than GST revenue. Direct taxes on wages and salaries are also seriously affected. Customs revenues are also hit by the slowdown in imports. Central expenditures are stretched not only by the pandemic response but also by the needs of national security. This is a national problem not a central government problem alone," the centre said.

"Hence it is in the collective interest of centre and states, and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the central level when it could be done at the state level," the government said in the letter.

"This year the Indian economy, nay the global economy, is suffering from an exogenous shock, namely the COVID-19 pandemic, whose scope and scale is unprecedented in history. Parliament obviously could not have contemplated a historically unprecedented situation of huge losses of revenue from the base - arising from an act of God quite independently of GST implementation - affecting both central and state revenues, direct and indirect. Nevertheless, the operative sections of Section 7 do not make such a distinction. Compensation is payable for the entire shortfall (even if it is not on account of GST implementation). This position has been clarified by the Attorney General and is accepted by the central government," the government said.

State can choose either of the two options, after which their compensation, borrowing and repayment will be dealt with, the government said. The options are, however, applicable only for the shortfall in the current fiscal or 2020-21.

The shortfall in GST collection is Rs 2.35 lakh crore for fiscal 2021, the government said on Thursday.

Under the law that governs GST, states have been guaranteed payment for loss of revenue in the first five years since the GST came into force on July 1, 2017. This means states have been promised compensation for any revenue shortfall till 2022 - if they fell below 14 per cent annual growth since July 2017.