Covid-19 presents a tax crisis ahead of GST Council meet
The Covid-19 pandemic has worsened the economic slowdown in India. The slowdown was evident with a slide in the GDP growth rate since the last quarter of 2017-18, and also with falling tax collections even before the coronavirus pandemic hit the Indian economy.
This is going to be a big headache for the GST Council that is scheduled to meet on Thursday. To be held via videoconference, the GST Council meeting is expected to discuss the compensation payout to states and the legality of borrowing from the market to meet a revenue shortfall.
To deal with the coronavirus challenge, India went for a nationwide lockdown that led to the sudden closure of factories and other businesses. This resulted in the loss of employment and earnings to a yet to be estimated number of workers, as well as a revenue crunch for the government.
Different states have raised the issue with the Centre over the past five months, but now a research paper published by the State Bank of India has provided documentary evidence. The SBI paper says that state governments are the "most vulnerable" in the wake of an acute revenue shortfall.
Estimating the loss of revenue, the SBI report says states are staring at a loss of Rs 53,000 crore in VAT and excise and stamp duties due to the impact of measures taken to counter the Covid-19 pandemic. If the dip in State GST (SGST) is added to this, the revenue shortfall increases to Rs 1.2 lakh crore during just the April-June quarter.
The SBI paper's estimate for the entire financial year is a revenue shortfall of around Rs 3 lakh crore for the 20 states the study surveyed. Adding the revenue shortfall of the Centre would bring the combined loss to Rs 4.5 lakh crore in 2021.
The paper underscores that states are extra vulnerable as they have limited sources of tax revenue. Noting that states are at the forefront of the fight against the Covid-19 pandemic, the SBI paper recommends immediate fiscal support for them.
The research paper estimates that states have to spend an additional Rs 1.7 lakh crore in fighting and containing the coronavirus pandemic. If this amount is added, the cumulative slippage for the states would be around Rs 6.2 lakh crore.
States are already facing a cash crunch. An added revenue loss of such a scale is going to extend economic recoveries in different states, and also hamper the fight against the coronavirus pandemic.
The Centre had earlier allowed states to borrow from other sources in excess of the standard upper limit of three percent of the state GDP, provided the total borrowing does not exceed five percent of the GDP.
The SBI paper says that though this freedom gives states support of Rs 4.28 lakh crore, only eight states qualify under the criteria set by the Centre for borrowing.
Prescribing a solution, the SBI paper says "there is a need for an unconditional immediate direct transfer of the combined full amount of Rs 54,000 crores from SDRMF and NDRF" since India has declared Covid-19 pandemic a notified disaster.
"An endeavor should be made to transfer at least 50% of the remaining Rs 2.5 lakh crores and through a further hike in WMA [Ways and Means Advances] limits, and supporting additional borrowing of states through Open Market Operations by RBI and relaxing some of the conditional ties associated with borrowing," it said.
The Ways and Means Advances are temporary loan facilities provided by the RBI to the government. The purpose is to enable the government to plug a temporary shortfall of revenue and meet its scheduled expenditure. The RBI charges interest on this loan.
If the states are not provided immediate help, they will have to drastically cut their capital expenditure, complicating economic revival and unemployment situations further at a time when coronavirus-free normalcy is still many months away.