Faced with a sharp decline in goods and services tax (GST) collections due to the lockdown and disruptions in economic activities across the country, the central government may look at paying GST compensation to states using a portion of its borrowings.

Coming out of the first GST Council taking place against the backdrop of Covid-19 pandemic, Finance Minister Nirmala Sitharaman said that the Council decided to meet again in July with single point agenda to discuss the issue of compensation cess.

“If there is need for borrowings to meet compensation to states, who is going to borrow, how we are going to pay for it…,” she said about next meeting of the Council, hinting that fall in revenues has become big cause of concern for the Centre to meet its liability towards the states as per GST legislation.

Under GST law, states are guaranteed full compensation for any revenue loss for the first five years after the introduction of GST in July 2017. The compensation is gap between the actual revenue collected and projected revenue. The projected revenue is revenue growth of 14 per cent for states per year over base year 2015-16.

As per the GST Act, full compensation to the states has to be paid for a period of five years till FY22 only through the compensation fund that gets its funds through levy of GST compensation cess on few items. However, with the fund not getting enough collections since August 2019, GST compensation to states has been delayed. The Centre is now looking at getting the GST Council’s nod for a mechanism to finance the compensation.

The situation on GST revenue has worsened in the month of April, with several states indicating a shortfall in collections to the tune of 80-90 per cent of average monthly collections during this time of the year. In fact, Delhi has said its GST collections may end up at a mere Rs 300 crore in April against a collection of Rs 3,500 crore in the same month of the previous year. Other states like Tamil Nadu, Assam, West Bengal, and Andhra Pradesh are also facing severe revenue decline due to shrinking economic activities during the Covid-19 induced lockdown. The problem has continued into May as well.

With economic activity and GDP growth projected to remain subdued for most part of FY21, the Centre is looking at all possible means to meet its constitutional obligation of compensating the states for their revenue loss.

After February, when the Centre released GST compensation of Rs 19,950 crore for the months of October and November 2019, it has cleared only recently cleared dues for December, January and February.

The monthly compensation requirement for states in 2020-21 is being pegged at Rs 20,250 crore, government sources said, leaving a big gap between what needs to be paid and what is being collected. Even in FY21, monthly cess collections could be a low of Rs 7,000-8,000 crore or lower.

In 2019-20, the Centre had released Rs 120,498 crore GST compensation to states while it had collected only about Rs 95,000 crore in the form of compensation cess..