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We should not forget that the ongoing pandemic is not only affecting the revenue of states, it is impacting the Centre too 
The 43rd GST council happened on May 28 under the shadow of the COVID-19 second wave. needless to say , the difficulty of compensation to states was a key issue of dialogue aside from changes in GST rates on supply of products and services, and changes associated with GST law and procedure. As we all know , states agreed to hitch the new tax regime provided they were compensated for any revenue loss within the first five years from Dominion Day , 2017 to June 2022.
Today, state governments are battling their declining revenue and increased expenditures. The lower revenue growth curtails growth in expenditure and it seems that any revenue loss will further hurt spending. the most source of revenue for states are taxes. consistent with their allow FY21, about 70 percent of revenue comes from taxes. The revenue growth for states within the current fiscal is almost zero percent as compared to previous year. The second wave and accompanying lockdowns are likely to impact revenue this year too. it'll cause states demanding a better compensation.
Section 18 of the Constitution (101 amendment) Act, 2016 and Section 7 of GST (Compensation to State) Act, 2017 permits that the loss of revenue are going to be compensated to states at the top of each two months for five years. The shortfall is calculated assuming a 14 percent annual growth in GST revenue over the bottom year of 2015-16. Now, two questions arise: One, whether the compensation period should be extended; and, two, whether the compensation amount should be calculated at 14 percent revenue rate of growth .
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First, we are within the last of the five-year compensation period promised to states. Some states are asking that the amount of compensation be extended. Rajasthan Chief Minister Ashok Gehlot has written to Prime Minister Narendra Modi and asked that the payment of GST compensation to states be extended till 2027. The experts of Gulati Institute of Finance and Taxation (GIFT), which is affiliated to the Cochin University of Science and Technology, are of an equivalent view, and argue that as long as there's GST there should be GST compensation for states.
India is moving towards a one-nation, one-tax concept. Thus, the absence of GST compensation threatens the concept of GST. during this backdrop, minister of finance Nirmala Sitharaman assured states that a separate meeting of the GST council are going to be held to debate the difficulty of extending the GST compensation beyond 2022.
Second, whether the compensation should be calculated at 14 percent revenue growth. As per GIFT, while states had surrendered 51.8 percent of total tax income , the Centre sacrificed only 28.8 percent of gross tax income for getting into the GST regime. this suggests that the value of the introduction of the GST wasn't shared equally by the Centre and states, but they're sharing the GST revenue equally. This strengthens the case for the states to urge compensated at 14 percent.
At an equivalent time, one must not forget to ascertain the difficulty at hand from the Centre’s point of view.
We should not forget that the continued pandemic isn't only affecting the revenue of states, it's impacting the Centre too. The Centre’s total revenue has declined by 23 percent, the gross tax income by about 21.6 percent, and therefore the expenses have surged 13.4 percent in FY21. Hence, the fiscal deficit reached to Rs 18.2 lakh-crore (9.3 percent of the GDP) and Debt/GDP to about 90 percent.
Given this, is it right the a part of the states’ demand of a 14 percent compensation? Would the Centre be ready to compensate at that rate? Former Chief Economic Adviser Arvind Subramanian has suggested that the Centre and states negotiate a one-off political solution considering the effect of the pandemic on the economy.
The Centre, through the statement by Revenue Secretary Tarun Bajaj, has made its stand clear that the govt will take an equivalent methodology and formula as last year to calculate the gap for FY22. He expects the states’ revenue deficit would be around Rs 1.58 lakh-crore this fiscal. The Centre has estimated the entire state revenue deficit of Rs 2.69 lakh-crore, and expects to gather over Rs 1.11 lakh-crore though cess. Hence, Rs 1.58 lakh-crore would be borrowed this year. The formula for compensation borrowing is in situ since 2020.
In the last fiscal, the govt calculated Rs 2.35 lakh-crore of the entire revenue deficit for states after deducting the compensation cess of Rs 0.65 lakh-crore. The deficit was further bifurcated into GST revenue shortfall (Rs 0.97 lakh-crore) and therefore the rest was due to the pandemic. In FY21, the Centre had borrowed on behalf of the states and released Rs 1.10 lakh-crore for compensating the states.
It is hoped that this year the states are going to be entirely compensated by the Centre because the government is certain that the GST revenue collection will follow an equivalent path it's followed since October 2020. Data issued by the Controller General of Accounts for April 2021 also shows that there'll be limited impact on the economy as compared to 2020.
All said, it's likely that the Centre and therefore the states will find a middle way on GST compensation.