The Centre and states are set for intense negotiations over extending compensation to states for goods and services tax (GST) revenue shortfall beyond June 2022 , said three state government officials, seeking anonymity.

A special session of the GST Council is expected to be held to address the issue as it would require an amendment to the GST (Compensation to States) Act, 2017. Differences between the Centre and states already exist on the economic-growth- related assumptions behind GST compensation, they added.

“The rate for computing states’ protected revenue and how long the compensation should continue has to be discussed,” said one of the three officials. He added that many states were facing large deficits in GST receipts.

The existing practice for calculating states’ protected revenue takes into account a 14% annual increase over the base year of 2015-16. At a meeting in 2019, fifteenth finance commission chairman N.K. Singh had said that this benchmark for protecting states’ revenue was set when the nominal gross domestic product (GDP) growth was around 12.6%. This was not too difficult for the Centre to accommodate back then, but sluggish economic activity and inflation containment measures in subsequent years had put a burden on the GST system for protecting states’ revenues at the same level, Singh had said, according to the minutes of the meeting available with the Council.

“At the moment, we are focused on GST compensation for this financial year. Terms of extended GST compensation (beyond 2022) is open ended as of now,” said another state government official.

Gujarat, Haryana, Kerala, Karnataka, Maharashtra, Punjab, Tamil Nadu, Uttar Pradesh and Delhi were the highest recipients of GST compensation financed by way of debt in FY21, shows finance ministry data. Continuing the compensation beyond FY22 will be key to states’ fiscal stability. The gap between protected revenue and the GST amount collected by states grew from 23% in FY20 to over 36% in FY21, said a third official privy to the discussions at the Council.

Several states have reached out to the Centre emphasising the need for generous fiscal support in view of the mounting healthcare expenses amid the second wave of the covid-19 pandemic. On Monday, Kerala chief minister Pinarayi Vijayan wrote to 11 non-BJP ruled states asking them to jointly appeal to the Centre to procure all covid-19 vaccines and supply them to states for free. Vijayan said in a social media post that he has reached out to CMs of Tamil Nadu, Andhra Pradesh, Telangana, Chhattisgarh, Odisha, West Bengal, Jharkhand, Delhi, Punjab, Rajasthan and Maharashtra in this regard. Odisha chief minister Naveen Patnaik wrote to Union finance minister Nirmala Sitharaman earlier this month saying that lack of finances should not affect any state, Mint reported on 6 May. Punjab finance minister Manpreet Singh Badal in a communique to Sitharaman said the state had taken a grave risk by allowing its purchase tax to be subsumed into GST, and is facing a high revenue shortfall now.

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