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Editorial

ETEDIT-Compensate States For GST Shortfalls

December 06, 2019 05:56 AM

COURTESY ET EDIT DEC 6

Compensate States For GST Shortfalls
The Centre has reportedly informed the states that they could face shortfalls in goods and services tax (GST) compensation, due to lower tax revenues. This is not acceptable. It would crimp states’ spending that is direly needed to counter the slowdown in the economy. Given that states account for about 58% of the overall government expenditure in the country, it is important to ensure that they spend more to boost demand. Collections from special cesses on sin goods such as cigarettes — that do not devolve on states — are meant to take care of the compensation requirements. However, that is not the only way to compensate states. Instead, the Centre must raise its borrowings to ensure timely compensation payout to states for the shortfall in GST revenues.

The nominal GDP growth rate of 6.1% in the July-September quarter is about half the growth rate for the economy assumed in the Budget. This will naturally dent tax collections. State budgets predicated on devolutions pegged to the assumed rate of economic growth and resultant tax collections will also go haywire. The Centre should resort to extra borrowings without worrying excessively about a breach in its fiscal deficit target, to enable states to spend.


The GST compensation Act 2018 guarantees a 14% annual growth in tax revenues for the states from the amount collected by them in 2015-16, for a period of five years that ends in 2022. Many states reportedly want an extension of the deadline. GST has subsumed many levies and leaves audit trails on value addition across the production chain, helping shore up indirect taxes, besides helping track past undisclosed incomes. These audit trails must rigorously be followed up using modern datacrunching techniques. This would yield additional direct and indirect tax collections

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