By Tanya Lall and Manreet Kaur
A nationwide lockdown was imposed by the central government on March 25, 2020, in order to alleviate the spread of coronavirus. All economic activities had to be suspended except the essential ones and the ones carried out from home. As a result, all the economic activities which required persons to travel or work outside the home were stopped.
The COVID-19 pandemic not only resulted in the loss of income for many individuals and businesses but also the revenue of state and central governments. These arose because the government suffered massively due to the tax revenues that they would have otherwise generated from all such economic activities.
Economic activities determine tax revenue. Higher activity growth implies higher revenue and lower activity growth means lower revenue. As a result of the lockdown, nearly 65% of the economic sectors were shut which resulted in limited activities. Consequently, there was an impact on both direct taxes such as income and corporate tax, and on indirect taxes like customs and goods and services tax.
According to the ministry of finance, The Centre’s Goods and Services Tax collection dropped down from Rs 87,422 crore in July to Rs 86,449 crore in the month of August. As compared to the previous year’s collection, the collection in the month of August was 88% lower this year. Out of the gross revenue of Rs 86,449 crore in August, the Central GST collected is Rs 15,906 crore, State GST Rs 21,064 crore, Integrated GST is Rs 42,264 crore and cess is Rs 7,215 crore, the finance ministry said. The highest GST in August was collected from Maharashtra, at Rs 13,407 crore.
To resolve the issue of revenue shortfall being faced by the states amid the coronavirus crisis, the 41st meeting of the goods and services tax council was held on 27th august 2020 chaired by the finance minister Nirmala Sitharaman.
Earlier Under the central goods and services tax act, the states were guaranteed payment for any loss of revenue in the first five years of GST implementation from July 1, 2017. GST compensation grants will be offered to the states by the center if states’ GST revenue grows slower than 14%. In order to provide these grants, a GST compensation cess is levied by the centre on certain luxury and sin goods such as cigarettes and tobacco products, pan masala, caffeinated beverages, coal, and certain passenger vehicles. In this pandemic situation, the central government has released the GST compensation cess dues to provide relief to the states, which has jumped.
At the meeting, the states were given two solutions by the central government. The first option is to compensate only for the tax shortfall arising due to GST implementation and allowing states to borrow money while the interest on borrowings will be paid by the centre. The other is to allow states to directly borrow the entire tax shortfall, but the interest in such a case will be paid for by the states’ revenue, which is entitled to a lower rate of interest.
The options discussed for meeting GST shortfall are only for the current fiscal year. The GST Council will look at the issue again in April next year. However, the states have rejected both proposals.
The centre should come out with a proper plan to compensate the state governments. The one with a better credit rating and better options should borrow. Undoubtedly central government has a better credit rating and options to borrow including financial institutions and central banks with a strong balance sheet.
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