Rationalisation, reforms may test Centre-state relations at GST meet

States, especially Opposition-ruled ones, are expected to raise demand for extension of the compensation regime to bridge revenue shortfall beyond June 2022.

Under GST, as per cent the Goods and Services Tax (Compensation to States) Act, 2017, the states were guaranteed compensation at the compounded rate of 14 per cent from the base year 2015-16 for losses arising due to implementation.

Last week, the Finance Ministry notified the extension of the levy and collection of compensation cess till March 2026, in line with an earlier approval accorded by the GST Council last year for repayment of loans meant to compensate states for the five-year period since July 2017 rollout and not for any extension of compensation to states beyond June 2022.

“GST has been a good idea but badly implemented. Micro-level management in implementation did not happen. Because of that, states are in a very bad position. Extension of compensation scheme should happen,” Delhi Finance Minister Manish Sisodia told The Indian Express.

“Centre is not being asked to pay from its resources. The compensation funds were supposed to come from levy of cess. Till effective implementation of GST happens, the way it was envisaged, the compensation regime should be continued. States surrendered most of their taxation rights, VAT was one of the biggest components for them. 14 per cent growth was promised, which is not being achieved and it’s coming to an end. This is not done,” he added.

The Council is also expected to discuss interim recommendations of a ministerial panel on rate rationalisation including levying tax of 12 per cent on hotel rooms costing below Rs 1,000/day which are presently exempt, increasing rate on manufacturing services of leather goods, clay bricks from 5 per cent to 12 per cent, hiking GST on LED lamps, ink, knives, blades, power driven pumps, spoons, forks, dairy machinery from 12 per cent to 18 per cent and bringing in pre-packaged food items including rice, atta, curd, lassi, puffed rice at par with branded food items with a tax rate of 5 per cent. Additionally, it will discuss the Fitment Committee’s proposal to levy tax on the margins made by tour operators at a suitable rate along with a suggestion to make e-way bill mandatory for intra-state movement of gold above a threshold of Rs 2 lakh.

The way forward

More measures for compliance to plug revenue leakages are in the offing with a greater scrutiny to be over high-risk taxpayers. At the time of registration, measures such as better verification through use of mandatory biometric authentication for high-risk taxpayers, inclusion of electricity bill data, real time validation of all bank accounts against a particular PAN and geo-tagging have been suggested by a ministerial panel.

“Broadening the base is the only option, you cannot raise rates. Compliance has to be increased using technology to identify revenue leakage, bogus returns, which is not getting caught in the system at present,” Sisodia, who was a member of the GoM on system reforms, said.

Identifying risky behaviour of the new registrants/applicants using artificial intelligence and place the information on the back office for the field officer to carry  out mandatory physical verification of these taxpayers along with real time validation of bank accounts through integration of GST system with NPCI and inclusion of electricity bill metadata (CA No.) as a data field during  registration by new taxpayers are some of the measures going to be discussed in the Council meeting.

In 2021-22, only five out of 31 states/UTs — Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim — registered a revenue growth higher than the protected revenue rate for states under GST. Puducherry, Punjab, Uttarakhand, Himachal Pradesh and Chhattisgarh have recorded the highest revenue gap between the protected revenue and post-settlement gross state GST revenue in 2021-22.