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Is the 14% Revenue Guarantee to States Justified?
When the goods and services tax was introduced in July 2017, states were given a revenue guarantee of 14% per annum on their GST revenue over the base year 2015–16. Using data on revenue from subsumed taxes for 24 states and two union territories during the years 2012–16 preceding the GST, it is investigated whether the 14% revenue guarantee was justified. Not many states had a growth rate of subsumed taxes higher than 14% pre-GST, with most of them falling in the 5%–12% growth rate band. It is estimated that the potential savings in the compensation payment due from 1 July 2017 to 31 March 2020—if the states were assured of compensation at their respective historically achieved tax buoyancy—would have ranged between ₹ 1.8 lakh crore and ₹ 2.12 lakh crore.
The goods and services tax (GST) was rolled out across the country on 1 July 2017. It replaced several existing taxes levied by the central and state governments.1 Since GST is a national destination-based tax, the erstwhile central sales tax leviable by origin states on goods exported to other states, which coexisted with the value added tax on sales of goods levied by states within their respective jurisdictions, ceased to be a source of revenue to major manufacturing states. To allay these revenue fears, the GST (Compensation to States) Act, was enacted in 2017 with a guarantee to all states of an annual growth rate of 14% in their GST revenue over the base year 2015–16 during the five-year period July 2017–June 2022 (Ministry of Law and Justice 2017b). This guarantee was fully prescribed in the compensation act of 2017. The guarantee was to be covered by imposing a non-rebatable cess on goods designated as sin or luxury goods.2 Thus, the consumers of these goods, in effect, bore the cost of the revenue guarantee.
The GST compensation to states became an issue when the economic slowdown began to affect GST revenue collections and the cess collection fell short of the compensation payments due to states, resulting in delays in release of compensation dues to states. Compensation due from December 2019 to February 2020 was released in June 2020 and for March 2020 in July 2020. Further, the Government of India has made it clear that it is in no position to provide compensation to states for the entire shortfall in GST revenues during the current fiscal year 2020–21. States were offered two borrowing options by the union government, by partitioning the overall shortfall into a segment quantified at ₹ 97,000 crore,3 which was designated as that owing to the implementation of GST, and the residual, which was ascribed to the adverse COVID-19 shock (Press Information Bureau 2020). The states were given two borrowing options to meet this shortfall. They could either choose to (i) borrow ₹ 97,000 crore (subsequently revised to ₹ 1.1 lakh crore), which is the shortfall arising out of GST implementation through the issue of debt under a special window coordinated by the Ministry of Finance or (ii) borrow the entire shortfall in GST revenue collection of ₹ 2,35,000 crore through the issue of market debt. There is a considerable consternation among states and they are vexed with the solution offered as an abrogation of the agreement.
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