Given the ongoing shortfall in GST collection and uncertainty associated with revenue on account of SGST collection, many states have approached the Fifteenth Finance Commission (FFC) for possible extension of the GST compensation period by another three years, i.e., up to 2024-25. Since the decision on possible extension of the GST compensation period is yet to be taken, it is important to assess possible impact of withdrawal of GST compensation beyond the transition period, i.e., beyond 30 June 2022, on Indian state finances. Any shock to state finances due to withdrawal of GST compensation after the GST transition period may have profound impact on India’s fiscal management and therefore macroeconomic stability. Since such impact assessment has not been carried out in Indian public finance literature yet, the present paper attempts to fill the gap.

 

Even if the GST compensation period is extended beyond 30 June 2022, union government may not have adequate fiscal space to provide GST compensation to states at the ongoing annual growth rate of 14 percent, unless either tax buoyancy and/or nominal growth rate of GDP improves. Exploring a possible design of GST Compensation Cess may help the governments to reduce uncertainty (arbitrariness) in setting the growth rate of revenue protection and also provide inducement to states to put additional tax efforts to augment GST collection. Moreover, given the uncertainties associated with GST collection and possible recovery of Indian economy from the ongoing slowdown, a suitable design of GSTCC may release stress from the union finances on account of GST compensation payment obligation. 

 

Key Words: Goods and Services Tax (GST), GST Compensation Cess, Revenue Protection, Fiscal Stress, Tax Design, Indian State Finances.