The Goods and Services Tax (GST) Council has scheduled two crucial meetings -- on August 27 it will consider a proposal to borrow money from the market to compensate states for their revenue shortfalls, and on September 19 the apex federal body will take up other issues such as resolution of the inverted duty structure, tax on pan masala and more measures for ease of doing business, two officials said.
As told by finance minister Nirmala Sitharaman after the 40th meeting of the council on June 12, the August 27 meeting will be special as it will discuss only one matter how to pay compensation to states at a time when the compensation cess collection has plunged because of weak economic activities due to Covid-19 pandemic, the officials said requesting anonymity.
While briefing reporters after the 40th meeting, Sitharaman had said on request of members the Council would meet again in July to discuss only “one-agenda item” -- compensation to states. “Compensation, which has to be given to states, and, if at all, it results into some kind of borrowing, how and who is going to pay for it,” she had said. The meeting was, however, deferred to August, due to some technical reasons, officials said.
At the time of introducing the new indirect tax regime in July 2017, the GST law assured states a 14% increase in their annual revenue for five years (up to 2022) and their revenue shortfall should be made good through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products.
{{/usCountry}}At the time of introducing the new indirect tax regime in July 2017, the GST law assured states a 14% increase in their annual revenue for five years (up to 2022) and their revenue shortfall should be made good through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products.
{{/usCountry}}The 41st meeting of the Council is to resolve the difference between the Centre and states over the responsibility of the cess liability. While states argue that it is the Centre’s responsibility to pay compensation in time, the Centre cited the GST law where the responsibility lies with the GST Council, the officials said. GST Council is headed by the Union finance minister and finance ministers of states are its members. Usually, the Council’s decisions are unanimous.
One of the officials mentioned above said although the GST law assured a 14% increase in annual tax revenue of states, but GST collection in 2020-21 is unlikely see such growth. “There is virtually no money left to pay compensation to states from April 2020, hence market borrowing is one of the solutions, but who will take the guarantee is a big question that needs to be resolved,” he said.
The states were paid Rs 1,65,302 crore GST compensation in 2019-20, even as total cess collection for the fiscal year was a mere Rs 95,444 crore. This gap is expected to be larger this year because of pandemic, he said. “Law is very clear, compensation has to be paid from the amount collected through compensation cess and not from the Consolidated Fund of India,” he added.
According to a note circulated in the 40th GST Council meeting held on June 12, compensation cess collected in 2017-18 was Rs 62,612 crore, rose to Rs 95,081 crore in 2018-19 and further to Rs 95,444 crore in 2019-20. Compensation paid in 2017-18 was however, less than the total collection at Rs 41,146 crore and Rs 69,275 crore in 2018-19.
Officials said it is up to the Council to find a solution, how to augment revenue collection and how to pay the compensation. Theoretically, the options before the Council for meeting the shortfall could be to rationalise tax rates, include more items under the compensation cess or increase the compensation cess, or recommend higher borrowing by states to be repaid by the future collection into the compensation fund, they said. States, particularly ruled by the Opposition parties, however, said that timely payment of full compensation is the responsibility of the Union government.
Officials said, the 42nd meeting of the Council on September 19 is generic in nature and may consider revising tax on several items that suffer from inverted duty such as fertilisers, footwears, renewable energy devices, tractors and man-made yarns and fabrics. Inverted duty structure is a situation in which inputs are taxed at a higher rate than finished goods.