COVID-19: States Face Fund Cuts and Delay in Tax Arrears from Centre

A common concern among the states during the country-wide lockdown to contain the COVID-19 pandemic has been the central government’s delay in release of Goods and Services Tax (GST) arrears and cuts in the budgetary allocations to states. At a time when state governments are expecting special packages from the Centre for combating disruptions due to the COVID-19 outbreak, the Narendra Modi government is yet to address the fiscal demands. 

On April 20, the Union Finance Ministry sanctioned the release of Rs 46,038 crore to states as their share of central taxes and duties due for three months till March, stating that the tax devolution was made as per the recommendations of the 15th Finance Commission. However, it has been reported that the Centre has slashed the installment by 17.81% to all states. For instance, while Telangana was expecting to receive Rs 1,192 crore through the installment, the Centre has allocated only Rs 982 crore. 

Meanwhile, the 15th Finance Commission is in discussion with the Economic Advisory Council to assess the impact of the pandemic on India’s economy. However, several opposition parties have raised doubts on whether the Finance Commission has consulted the state governments to seek its views.  

Also read: Why India’s Covid-19 Package is Grossly Inadequate

States have also dissented over the Centre’s allocation of revenue deficit for financial year 2020-21. While the 15th Finance Commission has recommended Rs 74,340 crore as revenue deficit grants to states, despite accepting the recommendations, the Centre has changed its stance to allocate only 40% of the amount. Of this, as first instalment, the Centre disbursed Rs 6,195 crore revenue deficit grant to 14 states. 

GST Arrears

Numerous state governments are still awaiting compensation of GST arrears from the Centre despite repeated requests for the sanction of their rightful funds. Reportedly, after months of delay, the Centre has paid a total of Rs 34,053 crore pending GST compensation cess for October and November. The central government is yet to pay the GST dues to states for December and January months. 

Demands for Special Package

The ensuing lockdown has resulted in unprecedented revenue losses to the state governments which are worried about payment of salaries to its employees in the coming months due to lack of funds. While this has prompted the state governments to demand special packages from the Centre, so far, there has been no response. 

Relaxations in Fiscal deficit limits

Furthermore, states including Bihar, Kerala and Telangana has repeatedly appealed to the Centre for raising Fiscal Responsibility and Budget Management (FRBM) limits. Under FRBM, the states are mandated to keep their fiscal deficit under 3% of their respective gross state domestic product (GSDP). While relaxations in the fiscal deficit limits will help states to deal with additional spending related to the pandemic, the Centre has remained silent over the matter.