Several states Thursday demanded extension of goods and services tax (GST) compensation beyond the five-year period ending June 2022, citing stress in their financial position due to the pandemic.

They also called on the federal government to take on a bigger share in centrally sponsored schemes, higher borrowing limits and assistance in capital expenditure during a pre-budget meeting with finance minister Nirmala Sitharaman.

Rajasthan, Tamil Nadu, Chhattisgarh, Kerala, West Bengal, Delhi backed the demand for an extension of the compensation period.

“There has been a loss of revenue to the states due to the GST tax system,” Chhattisgarh chief minister Bhupesh Baghel said. “The Centre has not made arrangements to compensate the loss of revenue of about ₹5,000 crore to the states in the coming year, so the GST compensation grant should be continued for the next five years after June 2022.”

Fiscal Health at Stake

Rajasthan and West Bengal wanted the compensation cess extended until 2026-27. Kerala sought a five-year extension. “Crisis due to pandemic was not anticipated when this was fixed,” said West Bengal urban development and municipal affairs minister Chandrima Bhattacharya.

The Centre had committed to compensate states for any revenue loss on account of the transition to GST, which was rolled out on July 1, 2017, for a period of five years. The compensation cess on luxury and demerit goods was introduced for this purpose.

The GST Council had in September extended the levy of the compensation cess until March 2026. But these collections are only to repay borrowings made in FY21 and FY22 by states to meet the deficit in the cess fund. “Almost all states including Delhi want continuation of GST compensation for states beyond 2022,” deputy CM and finance minister of Delhi Manish Sisodia told reporters after the meeting.

If the window is not extended, the financial position of states could deteriorate, he said. GST was meant to benefit states, but they haven’t gained much and are instead incurring losses, he added.

Baghel asked the Centre to reduce the cess levied by it on petrol and diesel instead of slashing central excise duty. Some states also expressed concern over rising inflation and wanted a reduction in taxes.

Higher borrowings

States wanted a higher borrowing limit for the next fiscal and support for capex.

Bhattacharya said states had asked for an increase in the Union government’s share in Centre-sponsored schemes. With regard to state borrowing, she said that additional borrowing windows should be without any restrictions.

Tamil Nadu finance minister P Thiagarajan also backed the demand for increasing the Centre’s share in schemes. He also wants the Centre to permit state borrowings of 5% of the gross state domestic product (GSDP) without any conditions for FY23.

Rajasthan education minister Subhash Garg echoed the demand on centrally sponsored schemes. “Our most significant demand is that the Centre’s share in centrally sponsored schemes has gradually reduced and states’ share has increased,” he said.