The first batch of B.Tech students will pass out in the next couple of months from six new IITs but they will not get their degrees unless Parliament passes an Amendment Bill.  M.Tech students who completed their course in IIT Hyderabad last year have not yet been awarded their degrees. The Institute of Technology (Amendment) Bill, 2010 is listed for consideration and passing in the Rajya Sabha on April 30, 2012 along with the National Institutes of Technology (Amendment) Bill, 2010.  Both Bills were passed in the Lok Sabha in 2011Both Bills confer the status of institutions of national importance to a number of new institutions, which implies that they have the power to award degrees (other technical institutions have to be affiliated with a university to be able to award degrees).  These institutions cannot award degrees until Rajya Sabha also passes the Bill, the President gives assent and the central government brings it into effect through a notification. Power to grant degrees The Ministry of HRD established six new Indian Institutes Technology (IITs) in 2008 and two in 2009.  It also established five new Indian Institutes of Science Education and Research (IISERs).  However, they are still awaiting for the power to be recognised as degree granting institutions.  Entry 64 of the Union List states that only Parliament can declare an institution to be an institution of national importance (see here and here).  Also, the University Grants Commission Act, 1956 states that the right to confer degrees can be exercised only by a university, deemed university or any institution specially empowered by an Act of Parliament to do so. According to news reports, students of the new IISERs who passed out in 2011 have not received their degrees because of the legislative delay.  Similar problems were reported by students in IIT-Benaras Hindu University.  The students of the new IITs, which were set up in 2008 would be passing out this year.  It is likely that they would face similar problems.  In fact, IIT-Hyderabad is already in the news for not being able to award degree to its Masters students. Highlights of the Bills The Institute of Technology (Amendment) Bill, 2010 amends the Institutes of Technology Act, 1961, which declares certain Institutes of Technology to be institutions of national importance by adding eight new Indian Institutes of Technology (IITs) in Bhubaneshwar, Gandhinagar, Hyderabad, Indore, Jodhpur, Mandi, Patna, Ropar.  It also seeks to integrate the Institute of Technology, Banaras Hindu University (BHU) within the ambit of the Act.  All these institutions shall be declared as institutions of national importance (see here for a Bill Summary). The Bill was referred to the Standing Committee on HRD, which raised a few issues with regard to lack of clarity about the zone in which IIT-BHU shall be operating, the need to preserve the autonomy of the IITs and the need to fulfil qualitative parameters before the new IITs could transform into institutes of national importance (see here for the Standing Committee Report and a Summary). The National Institutes of Technology (Amendment) Bill, 2010 amends the National Institutes of Technology Act, 2007 to add a schedule of five Indian Institutes of Science Education and Research (IISER) (established in Kolkata, Pune, Mohali, Bhopal and Thiruvananthapuram).  These institutions shall be declared to be institutions of national importance.  Currently, there are 20 institutions listed as institutions of national importance under the 2007 Act (see here for a Bill Summary). The Standing Committee Report on the Bill made a few recommendations: (a) the composition of the Board of Governors should be made more expert specific in with the mandate of IISERs; (b) IISER Council should have less number of Secretaries, and (c) details of the inter-disciplinary knowledge regime should strive toward flexibility and freedom in research (see here for the Standing Committee Report and a Summary).

Later this week, the GST Council will meet to discuss the issue of GST compensation to states.  The central government is required to compensate states for any loss of revenue they incur due to GST.  The Centre must pay this compensation on a bi-monthly basis, but over the past one year these payments have been delayed by several months due to lack of funds.  The COVID-19 pandemic and the consequent lockdown have amplified the issue manifold, with both centre and states facing a revenue shortfall, limiting the ability of the Centre to meet states’ compensation needs.

Why is the Centre required to compensate states for GST?

With GST implementation in 2017, the principle of indirect taxation for many goods and services changed from origin-based to destination-based.  This means that the ability to tax goods and services and raise revenue shifted from origin states (where the good or service is produced) to destination states (where it is consumed).  This change posed a risk of revenue uncertainty for some states.  This concern of states was addressed through constitutional amendments, requiring Parliament to make a law to provide for compensation to states for five years to avoid any revenue loss due to GST.

For this purpose, the GST (Compensation to States) Act was enacted in 2017 on the recommendation of the GST Council.  The Act guarantees all states an annual growth rate of 14% in their GST revenue during the period July 2017-June 2022.   If a state’s GST revenue grows slower than 14%, such ‘loss of revenue’ will be taken care of by the Centre by providing GST compensation grants to the state.  To provide these grants, the Centre levies a GST compensation cess on certain luxury and sin goods such as cigarettes and tobacco products, pan masala, caffeinated beverages, coal, and certain passenger vehicles.  The Act requires the Centre to credit this cess revenue into a separate Compensation Fund and all compensation grants to states are required to be paid out of the money available in this Fund.

How much compensation is provided to states?

For 2018-19, Centre gave Rs 81,141 crore to states as GST compensation.  However, for the year 2019-20, the compensation requirement of states nearly doubled to Rs 1.65 lakh crore.  A huge increase in requirement implies that states’ GST revenue grew at a slower rate during 2019-20.   This can be attributed to the economic slowdown seen last year, which resulted in a nominal GDP growth of 7.2%.   This was significantly lower than the 12% GDP growth forecast in the 2019-20 union budget (Figure 1).

Figure 1:  GDP growth rate (2017-21)

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Sources:  Union Budget Documents; MOSPI; PRS.

In 2019-20, the gross GST revenue (Centre+states) increased by just 4% over the previous year.  Despite this, due to the compensation guarantee, all states could achieve the growth rate of 14% in their GST revenue – much higher than the overall growth in GST revenue.  However, there was a delay in payment of compensation from Centre.   More than Rs 64,000 crore of the compensation requirement of states for 2019-20 was met in the financial year 2020-21.

What led to a delay in payment of compensation to states?

In 2019-20, the delay in payment was observed due to insufficient funds with Centre for providing compensation to states.  These funds are raised by levying a compensation cess on the sale of certain goods, some of which were affected by the economic slowdown.  For instance, in 2019-20, sales of passenger vehicles declined by almost 18% and coal offtake from domestic coal companies reduced by nearly 5%, over the previous year.  As a result, cess collections registered a growth of just 0.4% in 2019-20 (Figure 2), against the 104% increase seen in the compensation requirement of states.  This resulted in a shortfall of funds of nearly Rs 70,000 crore.

Figure 2:  Cess collections insufficient for providing compensation

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Note:  In 2017-18, GST was implemented for only nine months.  Compensation amount shown may not match with the amount released in that financial year because of delay in releases.

Sources:  Union Budget Documents; Ministry of Finance; GST Council; Lok Sabha Questions; PRS.

How can compensation be paid to states if cess collections are insufficient?

The shortfall in collections for 2019-20 was met through: (i) surplus cess collections from previous years, (ii) partial cess collections of 2020-21, and (iii) a transfer of Rs 33,412 crore of unsettled GST funds from the Centre to the Compensation Fund.   These unsettled funds are GST collections, generated in 2017-18 from inter-state and foreign trade, that have not yet been settled between centre and states.

In the 2020-21 budget, the Centre has estimated a 10% growth in nominal GDP.  However, due to the impact of COVID-19 and the lockdown, the actual growth in 2020-21 is likely to be much lower.  In such a scenario, states’ GST revenue would also be much lower than expected, thus leading to a higher compensation requirement.  However, the ability of Centre to pay compensation depends on the cess collections, which are also getting impacted this year.  For instance, cess collections during the period Apr-Jun 2020 have been 41% lower in comparison to the same period last year.  Moreover, of the Rs 14,482 crore collections made during this period, Rs 8,680 crore has been likely used up for paying compensation for 2019-20.

Note that under the GST (Compensation to States) Act, 2017, Centre can provide compensation to states only through the money available in the Compensation Fund.   The Union Finance Minister, in her budget speech in February 2020, clarified that transfers to the Fund would be limited only to collections of the GST compensation cess.  Despite a shortfall of money in the Compensation Fund, the Centre is constitutionally obligated to meet states’ compensation requirement for a period of five years.

Various measures have been suggested to address the issue of shortfall in the Fund, either by reducing the compensation payable to states (which would require Parliament to amend the Act following GST Council’s recommendation) or by supplementing the funds available with Centre for providing compensation to states.   The Act allows the GST Council to recommend other funding mechanisms/ amounts for credit into the Compensation Fund.  For example, one of the measures proposed for meeting the shortfall involves Centre using market borrowings to pay compensation to states, with the idea that these borrowings will be repaid with the help of future cess collections.  To enable this, the GST Council may recommend to Centre that the compensation cess be levied for a period beyond five years, i.e. post June 2022.

Impact on states post 2022

In 2019-20, except for a few north-eastern states, most states saw their compensation requirements increase multifold by 2-3 times, over the previous year’s figures.  Table 1 shows the compensation requirement of states for the years 2018-19 and 2019-20.  Six states (Delhi, Gujarat, Karnataka, Maharashtra, Punjab, and Tamil Nadu) accounted for 52% of the total requirement of compensation for 2019-20.  Further, in some states such as Punjab and Delhi, compensation grants form a significant share of the overall revenue receipts (20% and 16% resepctively).  

Note that states have been guaranteed compensation only for a period of five years.  After June 2022, states dependent on compensation will observe a revenue gap due to a cut in these grants coming from Centre.  States have roughly two years to bridge this gap with other tax and non-tax sources to avoid a potential loss of revenue, and a consequent fall in the size of their state budget, which could adversely affect the economy.  To what extent will such concerns be alleviated remains to be seen based on the course of action decided by the GST Council.

Table 1:  GST compensation requirement of states for 2018-19 and 2019-20 (in Rs crore)

State

2018-19

2019-20

% increase in compensation requirement

Amount

As a % of revenue

Amount

As a % of revenue*

Andhra Pradesh

0

-

3,028

3%

-

Assam

455

1%

1,284

1%

182%

Bihar

2,798

2%

5,464

4%

95%

Chhattisgarh

2,592

4%

4,521

7%

74%

Delhi

5,185

12%

8,424

16%

62%

Goa

502

5%

1,093

9%

118%

Gujarat

7,227

5%

14,801

10%

105%

Haryana

3,916

6%

6,617

10%

69%

Himachal Pradesh

1,935

6%

2,477

8%

28%

Jammu and Kashmir

1,667

3%

3,281

5%

97%

Jharkhand

1,098

2%

2,219

4%

102%

Karnataka

12,465

8%

18,628

11%

49%

Kerala

3,532

4%

8,111

9%

130%

Madhya Pradesh

3,302

3%

6,538

4%

98%

Maharashtra

9,363

3%

19,233

7%

105%

Meghalaya

66

1%

157

2%

138%

Odisha

3,785

4%

5,122

5%

35%

Punjab

8,239

13%

12,187

20%

48%

Rajasthan

2,280

2%

6,710

5%

194%

Tamil Nadu

4,824

3%

12,305

7%

155%

Telangana

0

-

3,054

3%

-

Tripura

172

1%

293

3%

70%

Uttar Pradesh

0

-

9,123

3%

-

Uttarakhand

2,442

8%

3,375

11%

38%

West Bengal

2,615

2%

6,200

4%

137%

Note:   Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim did not require any compensation in 2018-19 and 2019-20.

*Revenue for the year 2019-20 does not takes into account those GST compensation grants which were payable to states in 2019-20 but were released by Centre in the year 2020-21. The percentage figures would be slightly lower if such grants are included in 2019-20 revenue.

Sources:  State Budget Documents; Ministry of Finance; Lok Sabha Questions; CAG; PRS.