No decision on extending GST compensation

States are set to lose the shield of 14% assured annual revenue growth guaranteed under the goods and services tax (GST) law from Friday as previously decided, with the GST Council on Wednesday not taking a call on an extension sought by around a dozen states, particularly those ruled by non-NDA parties, worried about a sharp fall in their revenue.

Addressing a press conference after the two-day meeting of the 47th GST Council in Chandigarh, Sitharaman said some states did raise the issue of compensation on Wednesday, with the general drift being that it could be continued for a few more years, if not the five sought. But no decision on this was taken (nor did analysts expect one to be, ahead of the meeting). 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.

Rajasthan’s cabinet minister Shanti Kumar Dhariwal told reporters in Chandigarh that the states raised the matter in vain. “We received no assurance in spite of raising the demand that in view of economic instability of most of the state governments it is imperative to extend the revenue compensation period,” he said while speaking on the sidelines of the council’s meeting.

Analysts have maintained that the assured compensation is one reason for states pushing for lower rates on a variety of products and services, and that its end could encourage them to be more prudent.

Dhariwal said the pandemic has hit the finances of the states and added that Rajasthan is yet to receive ₹4,008 crore compensation that is pending.

A government official, who asked not to be named, said there is no pending compensation amount for any state. The official said, no state dissented on any matter and all decisions of the council were unanimous. “It is another matter that some of them often go out and express dissents to the media for political gains.”

Experts said they would have preferred a clear “No”. Some fear the cess, which was a temporary measure, could continue beyond 2026 and might become perpetual. While the legally-binding five-year period of compensation would end on June 30, 2022, the compensation cess on sin goods and luxury items could continue up to March 31, 2026, to retire debts ( ₹2.69 lakh crore) raised from the market to compensate states during the pandemic period.

Saurabh Agarwal, tax partner at EY India said the industry would need to further await conclusion on “contentious issues” like an extension of GST compensation to states.