States facing high GST shortfall, Bengal finance minister writes to Nirmala Sitharaman

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West Bengal finance minister Amit Mitra on Wednesday shot off a letter to Union finance minister Nirmala Sitharaman stating that the actual compensation due to the states on account of shortfall in GST collection has reached Rs 74,398 crore.

Revenue gap

Mitra also stated in the three-page letter that the own tax revenues of the states have shrunk 3% during FY21. “The gap between protected revenue and revenue collected has ballooned to Rs 2,75,606 crore,” wrote the finance minister in Mamata Banerjee’s cabinet.

Mitra’s contention comes against the backdrop of speculation over furious negotiations between the Centre and states on the issue of compensation to the latter for revenue shortfall after June 2022.

Interestingly, Mitra also mentioned that Infosys chairman Nandan Nilekani had informed the GST Council that “fraudulent transactions hit a peak of Rs 70,000 crore”.

Compensation calculation

Officials have been discussing the possibility of a special session of the GST Council on the vexatious matter since it might require an amendment to the GST Act 2017.

The issue of computation of protected revenue for the states might prove to be a vexatious one. According to current practice, it assumes a 14% annual rise on the base year of 2015-16. However, due to the slowdown in the economy it may not be easy to protect the revenue of the states, and, therefore, a lot of wrangling may take place on the issue.

Expenditure woes

While the states are facing revenue shortfall, their expenditure, especially in the healthcare and extending welfare measures to vulnerable sections due to loss of livelihood is increasing.

According to reports, the gap between protected revenue and GST collected by states rose from 23% in FY20 to 36% in FY21. Among the states that received high GST compensations were Punjab, Haryana, Gujarat, Maharashtra, Uttar Pradesh, Tamil Nadu, Kerala, Karnataka and Delhi.

Letter in early June

In the first week of June, Mitra had written to Sitharaman urging her to take urgent steps to address the fiscal stress of the state governments that are left reeling by the savage second wave of Covid-19 infection.

In that letter Mitra requested the Union finance minister to raise borrowing limits by the states and pushing up the GST compensation quantum for the current financial year.

Rs 2.13 lakh crore

Mitra’s suggestion was to allow the states to raise Rs 2.13 lakh crore instead of Rs 1.58 lakh crore as fixed by the finance ministry earlier. This amount is to raised through market borrowings.

The gap between cess requirement and the cess available stood at Rs 1.58 lakh crore according to the Centre’s estimates.

While the Centre had fixed the borrowing limit of the states at 4% of the gross state domestic product for the states, Mitra sought it be raised by 1 percentage point more. Moreover, it should be raised without any riders, Mitra wrote.

Capex rider

The Centre had said that 0.5% of the borrowing limit would be linked to the capital expenditure by the state. The Bengal finance minister, who was the secretary general of Federation of Indian Chambers of Commerce before joining the Mamata Banerjee cabinet in 2011, argued that the Centre’s policy of linking 0.5% of the borrowing limit to capital expenditure was almost a penalty since the states were struggling to find resources during the pandemic.

Keeping the 0.5% share for capital expenditure effectively leaves 3.5% for the governments, Mitra had pointed out.