At a time when opposition states are demanding extension of Goods and Services Tax (GST) compensation by five years from the Central government, Madhya Pradesh is the first BJP-ruled state that has joined the crescendo demanding additional support on the revenues front.
Talking to Outlook, Manoj Govil, principal secretary, department of finance in Madhya Pradesh government explained the challenges the state was facing in managing its finances.
“Covid-19 has impacted the country's economy to a great extent. This is likely to reduce the revenue of state governments in the coming years. To avoid this situation, we have requested the Centre to extend the GST compensation by another five years,” said Govil.
While the decision of extending the GST compensation period is taken by the GST council, Govil claims that the Centre has assured the MP government of considering their demand.
How GST Backfired For States
The NDA government had guaranteed a 14 per cent year on year increase in GST revenue to all state governments in India from July 2017 to June 2022. The guarantee was given to convince the states that they will not lose revenue due to the implementation of a new tax regime. Any shortfall in the 14 per cent yearly increase of revenue was to be met through the collection of GST cess levied on sin goods in the country. The states had agreed to this formula because for a large number of them, revenue was growing at less than 10 per cent for many years. However, after the first two years of implementing the GST, the Centre was finding it difficult to keep its promise of compensating state governments at the guaranteed rate of 14 per cent of revenue growth. This led to opposition states crying foul and accusing the Centre of not keeping its promise. In a recent interview with Outlook India, Chhattisgarh chief minister Bhupesh Baghel said that the Centre owed the state Rs 13,000 crore.
“It (Centre) has completely withheld these payments for the past three years. Similarly, the Centre has to pay over Rs 4,000 crore as coal compensation as per directions of the Supreme Court. In fact, the Centre has been pushing us to take loans in lieu of the Goods and Services Tax compensation,” said Baghel.
The Centre has blamed the pandemic for its woes and has promised to keep compensating the states for the shortfall in revenue in the coming years. According to finance minister Nirmala Sitharaman’s response in the Parliament in the winter session, the Centre was yet to transfer Rs 37,134 crore and Rs 14,664 crore worth GST compensation to states for 2020-21 and 2021-22 fiscal years respectively.
Since the Centre has struggled to collect funds through GST due to the pandemic, for 2020-21 and 2021-22 fiscal year, it has borrowed funds worth Rs 1.10 lakh crore and Rs 1.59 lakh crore respectively and transferred the money to the states as interest-free loan.
Row Over Centrally Sponsored Schemes
The MP government has also demanded higher allocation by the Centre for the Centrally Sponsored Schemes (CSS). Currently, the Centre contributes only 60 per cent. The Centre had changed the fund allocation formula for the CSS after the 14th Finance Commission recommended 42 per cent tax devolution from the Centre to states. Opposition states accused the Centre of coming back at them by changing the fund sharing formula of CSS to reduce the total money outgo from the latter’s coffers. Apart from MP, several other state governments including West Bengal and Chhattisgarh have demanded higher contributions from the Centre for implementing CSS. The states have also accused the Centre of interfering in the implementation of CSS by tying the allocation of funds to certain parameters, which affects their ability to take decisions on their own.
The Centre on its part has so far refused to listen to this demand and the topic continues to be a bone of contention in the Centre-States relations.