In its meeting on Saturday, the GST Council cut tax rates for key Covid-related medicines and equipment in line with the recommendations of the Group of Ministers (GoM) formed to go into the issue. While frequent changes in tax rates create uncertainty for businesses and households, doing so now in the midst of a pandemic, for a limited time period, to provide relief to financially stressed households struggling to meet their health expenses, is a judicious move. While some had argued in favour of zero rating of these items, which is done for exports, doing so would have required an amendment to the GST Act. On the other hand, exempting these products from GST would have placed manufacturers at a disadvantage as they would not have been able to claim input tax credit.
Beyond the issues relating to the adjustment of tax rates, some states are also reported to have raised the question of the GST compensation period. A separate meeting has been called to examine this matter in detail. The five-year GST compensation period that was originally agreed upon as part of the grand bargain between the Centre and the states will end in June 2022. Considering that revenue from GST has fallen well short of expectations — the 15th Finance Commission had estimated that while indirect taxes subsumed under GST amounted to 6.3 per cent of GDP in 2016-17, GST collections (excluding the compensation cess) were only 5.1 per cent of GDP in 2019-20 — states, unsure about their revenues post June 2022, are likely to ratchet up the pressure to extend the compensation period. While the Centre is yet to clearly spell out its views, how this issue is navigated is likely to have far-reaching implications for the already fraught Centre-state relations.
