ICRA: Shortfall of Rs. 150-250 billion likely in GST Compensation Fund in FY2020
ICRA assesses the compensation for the losses related to the Goods and Services Tax (GST), required by all the state governments for the period from October 2019 to January 2020, at Rs. 600-700 billion, which the Government of India (GoI) would likely disburse in Q4 FY2020. In the current fiscal, the GoI has already released compensation to the state governments for the period from February 2019-September 2019, totalling nearly Rs. 1 trillion, by December 2019. However, the growth in the headline GST collections has improved to 7.7% in November 2019 to January 2020, which may compress the compensation requirement of the state governments for this period to some extent, in ICRA’s view.
Jayanta Roy, Group Head – Corporate Sector Rating, ICRA Ltd, said: “ICRA projects the GST compensation required by all the states for October 2019 to January 2020 at around Rs. 600-700 billion, which the GoI is likely to disburse to them in the remainder of FY2020. Given the balance of around Rs. 170 billion available in the GST Compensation Fund in December 2019, and the amount of compensation cess of around Rs. 280 billion estimated to be collected in Q4 FY2020, this suggests a shortfall of around Rs. 150-250 billion in the GST Compensation Fund at end-FY2020, as per ICRA’s assessment.”
Based on the trends in the cess collected and the amount of GST compensation released by the GoI to the state governments during FY2018, FY2019 and FY2020 (till December 2019), ICRA estimates the balance available in the GST Compensation Fund to be around Rs. 170 billion. The GoI has pegged cess collection at Rs. 980 billion in its FY2020 RE, of which Rs. 705 billion had already been collected till December 2019, based on the data released by the Controller General of Accounts. This suggests that the GoI expects a further inflow of around Rs. 280 billion as cess in Q4 FY2020, which would flow into the GST Compensation Fund.
There was a steady increase in the compensation released to all the states to Rs. 353.0 billion for the months of August-September 2019, from Rs. 177.9 billion for the months of April-May 2019 and Rs. 279.6 billion for the months of June-July 2019. However, the growth in the headline GST collections has improved appreciably to 7.7% in the period from November 2019-January 2020 from 3.4% in April 2019-October 2019, which may compress the compensation requirement for this period to an extent.
The Budget Speech of the Union Finance Minister for FY2021 had indicated a decision to transfer to the GST Compensation Fund, the balances due out of the collection of the previous years, in two instalments. Thereafter, transfers to the fund would be limited to collection by way of GST compensation cess.
The GST (Compensation to States) Act, 2017, includes a provision to compensate states for loss of revenue, if any, on the items subsumed under the GST assuming a secular 14.0% growth rate for such items over the FY2016 revenues, for the initial period of five years after its introduction. Based on the recommendations of the GST Council, a cess is levied and collected on the sale of specific goods in the country and credited to a non-lapsable GST Compensation Fund. As per this Act, the GST compensation is released to the states at the end of every two months. Hence, the GoI has been providing the GST compensation to the state governments on a bi-monthly basis since September 2017, if the SGST collections inclusive of settlement of IGST are growing at a rate slower than 14%.
