Tamil Nadu Argues For Extended GST Compensation Period

Tamil Nadu is arguing for an extension in the period of compensation promised to states after the implementation of the Goods and Services Tax.

In 2017, when the Goods and Services Tax was introduced, in return for giving up their taxation rights, states had been assured that the centre would compensate them for five years for any shortfall in revenue, assuming a 14% increase in states' indirect tax revenue per year. The centre has since levied a compensation cess on luxury items and sin goods to fund this compensation.

The period of compensation ends in June this year, although arrears from previous years will continue to be paid out to states.

In his budget speech on March 18, Tamil Nadu Finance Minister Palanivel Thiaga Rajan said the end of compensation will mean that Tamil Nadu will face a revenue loss of approximately Rs 20,000 crore.

The former banker-turned-politician also argued for more 'untied' grants from the central government, which would give the state greater flexibility in spending.

"The Fifteenth Central Finance Commission has recommended certain sector specific and state specific grants. We urge the Union Government to provide these grants untied, instead of tying them to ongoing centrally sponsored and central sector schemes," Thiaga Rajan said.

The Fifteenth Central Finance Commission has recommended a 4.079% share for Tamil Nadu in the divisible pool of taxes. The state has been allocated Rs.21,246 crore as the local body grant for a period of five years, compared to the Rs.17,010 crore earmarked by the Fourteenth Central Finance Commission.

Tamil Nadu will see a reduction in the absolute level of the revenue deficit by over Rs.7,000 crore in FY22. This reverses a trend of increasing deficits every year since 2014, Thiaga Rajan said.

For financial year 2022-23, Tamil Nadu hopes to bring down the fiscal deficit to within 3.5% of the gross state domestic product. Nominal GSDP growth for Tamil Nadu is estimated to be 14% in 2022-23

The state, according to the Medium Term Fiscal Plan, will see revenue expenditure rise by 9.6% in FY23 over the revised estimates of FY22. Capital expenditure is expected to rise a sharper 13.46%.

"Now, as we see the economy bouncing back, we must rebalance our priorities and focus on social infrastructure and development without compromising on welfare schemes," said Thiaga Rajan.

The state plans to borrow a net amount of Rs 90,116 in FY23. This excludes an amount of Rs 6,500 crore anticipated from the central government towards back-to-back loan for GST compensation shortfall.

The state's outstanding debt as a percentage of GSDP is expected to be 26.29% at the end of FY23, declining to 25.93% in 2024-25, which is within the norms prescribed by Fifteenth Finance Commission. "Thus the State aims to maintain debt sustainability as part of its fiscal consolidation roadmap," the Medium Term Framework said.