Few states have sought extension of GST compensation for 5 years: FM

GST Council has recommended extending the period of levy of GST Compensation cess beyond June 2022 to cover the entire shortfall as well as servicing the back-to-back loan released to states

Finance minister Nirmala Sitharaman on Monday informed the Lok Sabha that a few states including Telangana have sought a five-year extension for the compensation paid to them for revenue shortfall due to GST implementation.

As per section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, Parliament shall, by law, on the recommendation of the Goods and Services Tax (GST) Council, provide for compensation to the states for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.

When a nationwide GST subsumed 17 central and state levies from July 1, 2017, it was decided that states will be compensated for any loss of revenue from the new tax for five years. That timeframe has ended on June 30 this year.

GST Council, in its 42nd meeting, has recommended extending the period of levy of GST Compensation cess beyond June 2022 to cover the entire shortfall as well as servicing the back-to-back loan released to states to meet their resource gap due to the short release of compensation, she said in a written reply to Lok Sabha.

Centre borrowed Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans to meet part of the shortfall in cess collection, she said.

In addition, she said, the government of India has further released Rs 86,912 crore to states/UTs on May 31, 2022 and cleared the entire provisionally admissible GST compensation due till May, 2022.

This decision was taken to assist the states in managing their resources and ensuring that their programmes especially the expenditure on capital is carried out successfully during the financial year, she said.

This decision has been taken despite the fact that only about Rs 25,000 crore was available in the GST Compensation Fund, she said, adding, the balance Rs 62,000 crore was released by the Centre from its own resources pending collection of cess.

As a result of the continued reforms in GST undertaken by Centre and states, on the recommendations of the GST Council, the finance minister said, buoyancy in GST revenue has been achieved in the recent months.

The average monthly gross GST collection for the first quarter of FY23 has been Rs 1.51 lakh crore against the average monthly collection of Rs 1.10 lakh crore in the first quarter of the last financial year, showing an increase of 37 per cent.

In reply to another question, the Finance minister said, global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian rupee against the US dollar.

Currencies such as the British pound, the Japanese yen and the euro have weakened more than the Indian rupee against the US dollar and, therefore, the Indian rupee has strengthened against these currencies in 2022, she said.

The outflow of foreign portfolio capital is a major reason for the depreciation of the Indian rupee, she said, adding, monetary tightening in advanced economies, particularly in the United States of America, tends to cause foreign investors to withdraw funds from emerging markets.

Foreign portfolio investors have withdrawn about USD 14 billion from Indian equity markets in 2022-23 so far, she said.

On the impact of falling currency, she said, nominal exchange rate is only one of the factors that impact an economy.

The depreciation of a currency is likely to enhance the export competitiveness, which in turn impacts the economy positively, while the depreciation also impacts the imports by making them more costly.

The Reserve Bank of India (RBI) regularly monitors the foreign exchange market and intervenes in situations of excess volatility. It has raised interest rates in recent months that increase the attractiveness of holding Indian rupees for residents and non-residents.

Earlier this month, the RBI raised the overseas borrowing limits for companies and liberalised norms for foreign investments in government bonds as it announced a slew of measures to boost foreign exchange inflows.

The RBI increased the ECB limit under the automatic route from USD 750 million or its equivalent per financial year to USD 1.5 billion, and eased norms for foreign portfolio investments in the debt market.