Centre to pay GST arrears to states despite losses due to 'Act of God'

Guwahati: Despite the massive shortfall in GST cess collection due to the COVID-19 pandemic, the Centre in a letter to the states promised that it would clear their GST arrears. This is a never seen before situation in which finance minister Nirmala Sitharaman herself it described as “an act of God”.

The letter by the Union government stated that it wants to steer clear of “avoidable borrowing at the central level when it could be done at the state level,” as the Central revenues are under “great strain” due to the novel coronavirus pandemic.

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Meanwhile, on September 1, the Union finance secretary and the expenditure secretary will hold an online meeting to answer any queries of the states on the two options that the Centre proposed. The first one will be on whether states won’t have to service debts or repay it from other sources. According to the second, states won’t have to repay the principal amount from any other sources.

According to the letter, the government stands with the statement of former finance minister Arun Jaitley and is actively working with 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 letter added.

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Additionally, it was the GST Council, which makes the national tax policies, that gave out the two options after a meeting on Thursday. They even asked the states to arrive on a decision within the week. The Centre is hard-pressed on paying GST dues to the states which have not earned much this year due to the COVID-19 pandemic that caused many lockdowns.

For example, Haryana has complained that it used to get the maximum revenue from taxes before the GST was introduced in July 2017. Additionally even Punjab said that it may see a revenue deficit of Rs 25,000 crore this year.

The letter also stated that the prevailing economic condition is such that even the central revenues are under a greater strain than the GST revenue. On top of that direct taxes on wages and salaries are also “seriously” affected. Additionally, even custom revenues are also hit by the lockdown 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 letter added.

“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,” said the government in the letter.

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The letter further stated, “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.”

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Hence, states can now use either of the two options after which the repayment, compensation, and borrowing will be dealt with by the government. However, these two options are only applicable to the shortfall in the year 2020-21 or the current fiscal year. On Thursday the government also said that the shortfall in GST collection is Rs 2.35 lakh crore.

Moreover, under the law which governs GST, it explains that the states have been guaranteed payment for loss of revenue in the first five years. GST came into force in July 2017 hence this means that the states have already been promised compensation for any revenue shortfall till 2022 (only if they fell below 14% annual growth since July 2017).

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