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December 24, 2020

NIPFP states worst case GST revenue gap at Rs. 2.45 lakh crore

by CA Shivam Jaiswal in GST

NIPFP states worst case GST revenue gap at Rs. 2.45 lakh crore

Introduction of GST was considered to be a significant step in the reform of indirect taxation in India. Amalgamating of various Central and State taxes into a single tax would help mitigate the double taxation, cascading, multiplicity of taxes, classification issues, taxable event, and etc., and leading to a common national market.

The current COVID-19 pandemic made the entire world sit up and realise that medical exigencies are unpredictable and can cause a financial upheaval that is tough to handle. With the commencement of 2020-21 financial year the effects of coronavirus have affected the stability of the economy of 150 countries – jeopardising their lifestyle, economy, impacting business and assumption of common wellbeing which we had taken for granted. The lockdown has adversely have affected service sector like banks, restaurants, food vendors, and food delivery providers.

India faced a huge decline in government revenues and growth of the income for at least two quarters as the coronavirus hit economic activity of the country as a whole. A fall in investor sentiment impacted privatization plans, government and industry.

The current scenario has also not been favourable for GST collections. The revenue shortfall for the GST compensation payable to States in 2020-21 may very well be about Rs 1.95 lakh crore within the best-case state of affairs, considerably decrease than the Rs 2.35 lakh crore estimated by the GST Council, as per a brand-new analysis paper by the National Institute for Public Finance and Policy (NIPFP).

What is the NIPFP?

  • The National Institute of Public Finance and Policy (NIPFP) is a centre for research in public economics and policies.
  • The Institute undertakes research, policy advocacy and capacity building in areas related to public economics.
  • One of the major mandates of the institute is to assist the Central, State and Local governments in formulating and reforming public policies by providing an analytical base.

What do you mean by GST Compensation Cess?

  • The GST Compensation Cess Act, 2017 provides for levy of a cess for the purpose of providing compensation to the States for loss of revenue arising due to implementation of GST for a period specified in the Act.
  • As per the Act and the accounting procedure, the entire cess collected during the year is required to be credited to a non-lapsable Fund (the GST Compensation Cess Fund) which shall form part of the Public Account and shall be used for the purpose mentioned i.e., for providing compensation to the States for loss of revenue.
  • Under the GST (Compensation to States) Act, states are assured compensation for the gap between revenues at a compounded growth rate of 14% over the base year revenue of 2015-16 and the actual revenues from GST for five years ending June 2022 through levy of cess on demerit and sin goods.

Paper published by an affiliate professor at NIPFP on shortfall in GST Compensation

  • Sacchidananda Mukherjee, an affiliate professor at NIPFP published a paper titled ‘The Pandemic and GST Revenue: An Assessment for Union and States’.
  • According to said report, uncertainties surrounding GST collection in financial year 2020-21 heightened due to ongoing COVID-19 pandemic.
  • The revenue gap is estimated for states by taking the difference between the projected GST collection and revenue under protection in GST for 2020-21.
  • The difference between the projected GST compensation cess collection in 2020-21 and sum of the revenue gaps of states provides the expected additional revenue requirement for full GST compensation payments to states.
  • As per estimates, shortfall in GST compensation fund is expected to be Rs. 1.95 lakh in the best-case scenario as against Rs. 2.35 lakh crore estimated by the GST Council.
  • In the worst-case scenario, the shortfall will be Rs. 2.45 lakh crore for the fiscal year 2020-21

Observations on GST Collections

  • Though the spread of COVID-19 was on an apparent decline in India, the economic impact of the pandemic was still evolving, as new waves of COVID-19 infection were striking locally.
  • Any estimate on revenue impact, thus, may not be free from shortcoming and constraints.
  • However, as GDP data of the last two quarters was now available, and as GST showed the brightest sign of recovery among all revenue streams, an attempt was made in this paper to project GST revenue for 2020-21
  • Using precise GST revenues between April and October 2020 and GST assortment tendencies up to now 13 quarters because the oblique tax regime was launched, totally different situations were extrapolated to estimate possible GST revenue total, in addition to State-wise collections.
  • The most GST revenue gaps this year were anticipated for Goa, Punjab, Chhattisgarh, Kerala and Chhattisgarh.

The paper concluded that, the revenue gap in State GST collections is expected to vary between Rs 2.85 lakh crore and Rs 3.27 lakh crore. GST compensation cess collection in FY21 is expected to vary between Rs 82,242 crore and Rs 90,386 crore. Therefore, shortfall in GST compensation fund is expected to vary between Rs 1.95 lakh crore to Rs 2.45 lakh crore.

It was also observed that there was a large difference in filing GST returns when GSTR-1 and GSTR-3B were compared. Reduction in mismatch between the two would result in significant increase in compliance and revenue. Lockdown due to COVID-19 outbreak may have caused difficulties for taxpayers to file GST returns in Q1 of 2020-21 but it has started improving thereafter

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