AS the slugfest over delayed compensation payment under the Goods and Services Tax (GST) regime escalates, the Goods and Services Tax (GST) Council could look at increasing the number of items on which cess is levied. Bihar’s Deputy Chief Minister and Finance Minister Sushil Kumar Modi said it was time states looked at measures to boost their compensation kitty, including bringing in more items into the ambit of the compensation cess under the indirect tax regime.
If an upward revision in GST levies is resorted to by the Council to shore up revenues, it would be the first time that a hike will kick in since the indirect tax regime was introduced in July 2017.
“States should think about how to increase their compensation kitty. They should start thinking about what other items can be brought into the ambit of cess (under GST). As per the GST law, compensation has to be paid to states through the cess collections, so states need to think about that,” Modi, who heads a group of ministers within the Council on ‘Analysis of revenue from GST’, told The Indian Express.
At present, compensation cess ranging from 1-290 per cent is levied on seven categories of goods such as pan masala, aerated drinks, cigarettes, coal, aircraft for personal use and automobiles, all of which are in the topmost 28 per cent rate slab.
Cess rates could be increased on the existing items on which cess is levied. GST officials, however, do not rule out the levy of cess on items in the 18 per cent slab that were brought down from the 28 per cent tax slab earlier, though it would require a rejig in the classification of items as “sin” and luxury goods.
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Another option could be to raise the GST rate on those items again to 28 per cent, which tax experts said could be more beneficial as it would automatically improve the State GST (SGST) share for the state governments given that any GST rate has an equal share of Central GST (CGST) and SGST.
This would indirectly help in raising the states’ share of revenues, thereby resulting in lower compensation payouts going ahead. Also, the Council is expected to look at items which may be out of the GST fold as of now but were earlier taxed under the pre-GST Value Added Tax (VAT) regime.
So far, the GST Council, since its rollout from July 1, 2017, has held 19 meetings in which it has undertaken around 10 rounds of rate cuts including a hike in the exemption threshold at the beginning of this year. At the beginning of GST, around 230 items were in the topmost 28 per cent slab, of which now only 37 items remain in the peak slab. The highest number of items are now in the 18 per cent tax slab at around 520.
A hike in GST rates may translate into better government revenues but being an indirect tax, a hike in GST rates, especially amid slowing economic growth, could have an impact on consumption demand.
Also, any more tinkering with GST rates could imply fresh changes in technical and operating systems for the industry. “Businesses would prefer that frequent rate changes are avoided as this requires several within organisations including process and ERP changes. Increase of cess in a few products that are price inelastic may be preferred to rate changes in order to augment revenues,” MS Mani, Partner, Deloitte India said.
Given the slowing revenue stream under GST over the last few months, states anticipated the compensation crisis to begin near the end of this financial year, around January-February 2020, but facing a delay as early as August in the financial year was not expected, a state finance minister said.
States have claimed unutilised compensation cess of Rs 50,000 crore and demanded immediate payments, with some saying it’s an embarrassment to keep asking for money due to them and Kerala warning it may even approach the Supreme Court. Union Finance Minister Nirmala Sitharaman has assured states but no specific timeline has been given for the compensation payment.
On the issue of delayed compensation payments, Modi said it seems to be a “technical/procedural issue” and should get resolved soon. “I feel the compensation payments have been delayed to states due to some technical/procedural issues and I expect those should get resolved as soon as possible,” Modi said. Bihar, like other major states, is also estimated to have a pending compensation payment of around Rs 3,000-4,000 crore.
As per GST law, states are guaranteed compensation for any revenue shortfall below 14 per cent growth (base year 2015-16) for the first five years ending 2022. GST compensation is paid every two months by the Centre to states.
The GST Council has now asked states to provide inputs and proposals regarding review of items under exemption, GST and compensation cess rates on various items, rate calibrations for inverted duty structure, compliance and revenue augmenting measures by December 6. The GST Council is scheduled to meet on December 18 to focus on “revenue augmentation”.