In GST Council’s meet tomorrow, compensation issue on agenda once again

Ten states are demanding that a dispute resolution system be set up to tackle differences over GST. They have refused to accept either of two options suggested by the Centre to make up the shortfall.

The Goods and Services Tax (GST) Council will on Monday discuss the way forward on the matter of compensating states for the shortfall in their share of the indirect tax revenue in a meeting, which will be chaired by Union finance minister Nirmala Sitharaman.

Union finance minister Nirmala Sitharaman speaks in the Lok Sabha in this file photo. (PTI Photo)

The GST Council had on October 5 put off the decision about funding the shortfall of GST revenue of states for a week. During that meeting, states governed by opposition parties insisted that the Centre borrow the entire Rs 2.35 lakh crore deficit and reimburse them.

These 10 states are demanding that a dispute resolution system be set up to tackle differences over GST. They have refused to accept either of two options suggested by the Centre to make up the shortfall. The Centre had suggested they could borrow Rs 1.1 lakh crore or the portion of the deficit resulting from GST implementation issues, without paying either the principal or interest. It had also said that the states could borrow the entire Rs 2.35 lakh crore, including the shortfall caused by the Covid-19 pandemic, at a significant cost.

These states want the Centre to borrow the money, reimburse the states in full and retire the debt from the amount raised as cess on luxury and sin goods luxury and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products.

As many as 21 states, which are ruled by the Bharatiya Janata Party (BJP) or have supported it on various issues, have opted to borrow Rs 1.10 lakh crore to meet the compensation shortfall. Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh are among them. The Centre has released Rs 20,000 crore to the states towards compensation shortfall so far in the current fiscal.

On Monday, the GST Council could discuss the suggestion of non-BJP ruled states of setting up a ministerial panel to develop consensus on the issue of compensation, according to news agency PTI. These states have already opted for the borrowing option given by the Centre.

Some of the opposition ruled states are demanding that a group of ministers be set up to arrive at a decision on the mechanism for funding compensation shortfall, the BJP-ruled states have said they should be given a go-ahead so that they can get money quickly.

Taxes are levied under 5%, 12%, 18% and 28% slabs under the GST structure. On top of the highest tax slab, a cess is levied on luxury, sin and demerit goods and the proceeds are used to compensate states for any revenue loss.

The impasse has brought forth an urgent need to put a GST dispute resolution system in place because the GST Council is unable to forge a consensus.

The GST law assured states a 14% increase in their annual revenue for five years (up to 2022) when the new indirect tax regime came into force on July 1, 2017, subsuming a raft of central and state levies. It also said their revenue shortfall should be made good using the cess levied on luxury goods and sin products. The GST Council has extended the cess beyond 2022.

The GST Council, for the first time since its inception, resorted to a division of votes on the issue of a tax on lotteries at its 38th meeting on December 18, 2019. Twenty-one members voted in favour of imposing a uniform 28% rate on both state-run and state-authorised lotteries, seven ministers opposed the proposal and three abstained.

The GST Council is empowered federal body on matters related to the indirect tax and chaired by the Union finance minister and represented by the finance ministers of states.