Factors Like Not Paying GST Compensation May Lead to Rs 3 Lakh Crore Cut in Capex by States in FY21: Report

In the Goods and Services Tax (GST) Council meeting held on August 27, the government pegged the gap between the GST compensation requirement of the state governments for FY21 and the expected GST cess collections at Rs 2.35 lakh crore, Icra said. The Centre had offered two options to the state governments for bridging this gap of Rs 2.35 lakh crore, which vary in terms of the amount that can be borrowed, the source of borrowing, rate of interest on borrowings, payment of interest, charge on cess collected after the five-year GST transition period ends in July 2022.

“We caution that the states may be forced to curtail their aggregate capital spending by as much as Rs 1-3.4 lakh crore in FY21, on account of the anticipated shortfalls in GST compensation and Central tax devolution (CTD), despite the options for additional borrowings put forth by the GoI,” the agency said. It can be noted that capital expenditure is considered as the most productive of any government’s expenses because of its ability to lead to what is called trickle-down benefits.

The agency estimated the Centre’s shareable taxes at Rs 13.4 lakh crore in FY21, 30 per cent lower than the budgeted amount of Rs 19.1 lakh crore. Given that it is expected to devolve 41 per cent of shareable taxes to the state governments in FY21, the CTD to the state governments will come at Rs 5.5 lakh crore. It also estimates that Rs 48,400 crore of excess CTD was devolved to the states in FY20, which would need to be adjusted from the CTD for FY21.

“This would further reduce the estimated CTD in the current fiscal to Rs 5.0 lakh crore, a substantial Rs 2.8 lakh crore lower than the Rs 7.8 trillion budgeted by the GoI,” it said.