State GST assistance might continue for two more years

11 Jul 2022 , 02:59 PM

The Centre is considering a few solutions to provide state governments affected by the expiration of the Goods and Services Tax (GST) compensation on June 30, 2022, with some financial relief.

According to the newly developed method, states will receive revenue protection for a duration of, say, two years, and at a rate far lower than the 14 percent annual increase they have seen over the last five years until June 30.

As per an official source, the plan is to provide them the flexibility to navigate the phase of slower income growth until the GST generates enough revenue momentum to solve the states’ revenue issues in the next three years.

One of the solutions entails restructuring the Rs 2.7 trillion in back-to-back loans that the Centre took in the previous two fiscal years to make up for the GST compensation cess fund deficiency. 

This would mean that starting in March 2026, the payback period for these loans, which were negotiated under a special RBI window at low charges, would be prolonged by one or two years. According to the source, this would provide the Centre with more money so it could continue to preserve states’ revenue for another two years, resulting in a revenue increase of 10—11%.

Obtaining fresh loans is a different alternative. Naturally, both possibilities would call for the cesses on “luxury and demerit items” to be extended through the end of FY26. As a way to pay for the special loans, these taxes have already been extended through March 31, 2026.

“A formal debate of expanding the compensation to states has not yet taken place. However, if the Centre is required to consent to pay the states’ compensation for a further time frame, it would undoubtedly renegotiate the 14 percent (guaranteed revenue growth), which has no foundation, a government official said.