Extend compensation period or raise GST mop-up share: States

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Several states have urged the Centre to either extend the five-year revenue compensation period beyond June 30 or substantially raise their share in the goods and services tax (GST) collections, even as the GST Council on Tuesday agreed on a slew of measures to reduce compliance burden and to rationalise tax rates, two people aware of the development said.

States are concerned about their finances as the five-year protection against any revenue shortfall will end after June 30. Opposition-ruled states such as Delhi, Punjab, and Kerala are more vocal about it, the people said, requesting anonymity.

“While Chhattisgarh has sent a letter to the chairperson in this regard, West Bengal has cautioned that the Centre must respect the views of all member states in the spirit of cooperative federalism,” one person said.

In a letter to the GST Council’s chairperson and finance minister Nirmala Sitharaman, Chhattisgarh minister TS Singh Deo said the state “suffered huge revenue losses” under the GST regime, which were made good through the existing mechanism of compensation.

In the letter dated June 27, he proposed “to continue with the 14% protected revenue” provision or provide states a larger share in the revenue pool. “If the protective revenue provision is not continued then the 50% formula for CGST [Central GST] & SGST [State GST] should be changed to SGST 80-70% & CGST 20-30%.” He could not attend the meeting after testing Covid positive.

At the time of its launch on July 1, 2017, the GST law assured states a 14% increase in their annual revenue for five years, and also guaranteed that their revenue shortfall, if any, would be made good through the compensation cess levied on luxury goods and sin products. The legally binding five-year period of compensation will end on June 30 unless extended by the ongoing 47th GST Council that will conclude on Wednesday.

Meanwhile, Amit Mitra, the principal chief adviser to the chief minister of West Bengal and former finance minister of the state, on June 28 wrote to Sitharaman giving reference of the recent Supreme Court ruling that recommendations of the council are not binding on its members. The GST Council is chaired by the Union finance minister and the states’ FMs are its members. “In the backdrop of this extremely significant observation of the Hon’ble Apex Court, it has become extremely important for the GST Council to invariably arrive at a consensus for taking any decision,” he said in the letter. Earlier, on June 11, he wrote to Sitharaman seeking to extend the compensation period by three to five years. HT reported the same on June 25.

The second person said the matter related to compensating states for their revenue shortfall beyond the initial five-year period could be taken up at the council’s meeting on Wednesday. “Besides, several decisions have been taken on Tuesday that pertain to better GST administration that includes biometric authentication and auto-population of data, ease of compliance, removal of unnecessary exemptions and corrections in duty structure. The finance minister [Sitharaman] will announce them after the meeting concludes tomorrow,” he said.

The first person quoted above said the council on Tuesday accepted the interim report of a group of ministers (GoM) that suggested to rationalise taxes on a host of goods and services to remove duty inversion and to withdraw exemptions for augmenting GST revenue. “A final decision on individual items could be taken tomorrow,” he said. The GoM recommended 5% GST on pre-packaged curd, lassi, flour, and puffed rice produced in bulk. Branded and packaged food items already attract 5% GST. Besides, it proposed a correction of the inverted duty structure on several items such as edible oil, coal, LED lamps, printing ink, finished leather, and solar water heaters. It also recommended withdrawal of exemption on hotel rooms below 1,000 per day and bring it under the 12% slab.

Pratik Jain, partner at consultancy firm Price Waterhouse & Co. LLP, said: “The GoM report is likely to focus on correction of inverted duty structure and reduction of exemptions wherever possible. It appears that enough deliberations have not happened on rationalization of rate structure and possible realignment of slabs from four to three. Given the current situation of inflation, the government would want to ensure that incidence of tax is not increased on items of mass consumption. Larger stakeholders’ discussion is perhaps needed on this.”


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