• The gap between GST cess collections and the revenue shortfall faced by the States for implementing the Goods and Services Tax (GST) could snowball to anywhere between ₹5 lakh crore to ₹7 lakh crore by June 2022 from the ₹2.35 lakh crore estimated for this year, the Fifteenth Finance Commission is learnt to have projected in its report. 
  • The Commission, which finalised its report proposing a framework for sharing revenues between the Centre and the States for the next five years on October 30, is learnt to have recommended a unique fiscal glide path for each State for the period 2020-21 to 2025-26, in a separate volume dedicated to the States. 
  • Given the uncertainty created by the pandemic and the economic slowdown that pre-dated the COVID-19 outbreak, the panel has had to rely on variable growth projections for each of the five years rather than assuming a steady trend.
  • The report will be submitted to President Ram Nath Kovid on Nov 9th.  
  • The panel has also delivered on its more unusual terms of reference, including the question of creating a separate mechanism for funding defence and internal security proposed by the Centre, citing inadequate budgetary provisions for large capital outlays needed for complete defence preparedness. 
  • The Commission has examined and responded to the Defence Ministry’s proposal to set up a non-lapsable fund for security-related expenditure, whether it should be funded by a cess or a surcharge, and supplemented by monetisation of surplus defence land, issue of tax-free defence bonds and disinvestment of defence public sector units, all points to the additional pressure on the Centre’s finances due to the fall in revenues and the flailing economy. 
  • Unless there is a sustained rise in GST collections over the next 20 months (till June 2022), the Commission has projected that the gap between the GST cess collections used to recompense States and their compensation dues could accumulate to a significant sum of between ₹5 lakh crore to ₹7 lakh crore.
  • The resolution and the modalities adopted for the payment of GST compensation dues to States would significantly impact the fiscal consolidation roadmap for India’s general government debt. 
  • While the revenue shortfall for States is pegged at ₹3 lakh crore this year, GST cess collections are expected to be just ₹65,000 crore, on account of the sharp contraction in the economy that was already slowing down before the COVID-19 pandemic and was exacerbated by the lockdowns. The Centre has allowed States to borrow from the market to meet part of the shortfall, with the assurance that loans will be serviced and repaid from future GST cess collections. 
  • The Centre had promised compensation for revenue losses to States on account of giving up their indirect taxation powers and switching to the GST regime, for the first five years of the new tax regime launched in July 2017.
  • A compensation cess was levied on so-called ‘sin’ and ‘demerit’ goods to finance this payout to States over the same period.