Protecting states’ revenue: Today’s GST Council meet likely to be fractious

Business & Economics

However, Bihar deputy chief minister Sushil Modi said on Tuesday that the Centre should borrow and pay GST compensation to states even if it is not legally bound to do so.

The Goods and Services Tax (GST) Council meeting on Thursday is expected to be fractious due to a lack of consensus among members on ways to mobilise funds to protect states’ revenue, as the designated compensation cess fund has proved inadequate in the current fiscal. The council would focus on this single agenda in its 41st sitting.

While the central government has floated the idea of market borrowing for additional funds, many state government are skeptical about the practicality of such a move as it would upset their budget and fiscal deficit estimates. Additionally, the Centre has also relied on the attorney general’s opinion that it is not obligated to compensate states if the compensation cess fund doesn’t have enough resources.

However, Bihar deputy chief minister Sushil Modi said on Tuesday that the Centre should borrow and pay GST compensation to states even if it is not legally bound to do so. “But the Centre is morally bound to do so,” Modi said at The Indian Express’ Idea Exchange.

The GST law mandates that states be compensated for any shortfall in reaching a 14% revenue growth target, which is calculated on FY16 revenue base from subsumed taxes. The compensation is to come from fund collected through cess imposed on certain luxury/sin items, which is paid bi-monthly and is to continue till 2022 — five years of the GST regime. States have also demanded that this period be extended by another two to five years.

Among other options to raise revenue or proceeds to compensation cess funds, the GST Council in December had discussed having two slabs of 10% and 20%, or moving items from 5%/12% slabs to higher brackets, withdrawing exemptions on certain items, bringing high-end healthcare and education under GST ambit and reversing rate cut on certain items that were brought down to 18% from 28% in earlier sittings of the Council.

However, many of these options on increasing tax rate wouldn’t find much traction in the current scenario where the economy needs steps to boost consumption, a tax official said. Further, even finance minister Nirmala Sitharaman statement on Tuesday on the need to cut tax rate on two-wheelers down from 28% is at odds with the proposals to raise taxes.

While the compensation fund was already stretched in FY20, the rectified I-GST apportionment carried out in FY18 was utilised meet the requirement along with surplus of compensation cess fund from previous years. A sum of Rs 1.65 lakh crore was disbursed to states against compensation cess collection of Rs 95,444 crore in FY20.

The Centre is yet to pay any compensation for the first four months of the current fiscal. The monthly protected revenue for FY21 stands at Rs 63,270 crore but even the July SGST collection was only `41,146 crore and the compensation cess collection was merely Rs 7,265 crore. The first three months of the fiscal was affected by Covid with only about GST collection down by as much as 50% in the first quarter, making it nearly impossible for compensation fund to be adequate.

In FY19, compensation cess collection stood at Rs 95,081 crore while disbursal was at Rs 69,275 crore. In FY18, the compensation payout was Rs 41,146 crore against collection of Rs 62,611 crore. The government had an unutilised cess fund of Rs 47,271 crore from FY18 and FY19, which it had employed last fiscal to augment collection. The protected revenue in the first three years of GST – from FY18 to FY20 – has been at Rs 43,000 crore, Rs 49,020 crore and Rs 55,900 crore, respectively.

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