1. GST Council meet: Compensation to states may rise from Rs 55,000 cr to Rs 90,000 cr after demonetisation hit

GST Council meet: Compensation to states may rise from Rs 55,000 cr to Rs 90,000 cr after demonetisation hit

The Centre on Monday flagged the idea of expanding the list of items to be brought under a specific cess to finance the states’ constitutionally provided five-year, 100% compensation for any revenue losses in the goods and services tax (GST) regime.

By: | New Delhi | Updated: January 4, 2017 10:35 AM
The Centre had said that raising the GST rates for the compensation could be more burdensome on taxpayers. The Centre had said that raising the GST rates for the compensation could be more burdensome on taxpayers.

The Centre on Monday flagged the idea of expanding the list of items to be brought under a specific cess to finance the states’ constitutionally provided five-year, 100% compensation for any revenue losses in the goods and services tax (GST) regime. The proposal, however, met with stiff resistance from states at the GST Council here, as they feared that it would necessitate the GST rates to be lower on a number of goods, including consumer durables which suffer tax incidence higher than 26% now.

While the compensation was earlier pegged at about R55,000 crore a year, it is now felt that the figure could be far higher — up to R90,000 crore in the first year after GST is brought in — given that states’ revenues have taken a hit due to demonetisation. The council had earlier computed the compensation based on states’ relevant revenue base of R4.42 lakh crore in 2015-16 and assuming 14% annual growth.

An earlier understanding at the council was that a cess will be imposed on three items — pan masala, aerated drinks and luxury cars — and the cesses on tobacco and fossil fuels be retained to raise the compensation funds. After much persuasion by the Centre, the states had then agreed to the idea of a new cess, as they thought the Centre should fund the compensation from its own revenue sources other than cesses.

The Centre had said that raising the GST rates for the compensation could be more burdensome on taxpayers than the cess because raising Rs 100 for the Centre via GST would require tax worth Rs 172 given the Finance Commission’s devolution formula.

Monday’s GST Council meeting also discussed the issue of taxing high-sea transactions in the GST regime — an issue has come up after the definition of “state” in the draft integrated GST (IGST) law threatened to deprive the states’ of their existing right to tax transactions within 12 nautical miles from the coast. West Bengal finance minister Amit Mitra said the Union finance minister Arun Jaitley has agreed to refer the matter to the law ministry for appraising the constitutional position. All coastal states are concerned about the new definition as many of them are generating revenues to the tune of R600-1,200 crore annually from high-sea sales, Mitra noted.

The vexed issue of dual control — division of the assessee base and administrative powers between the Centre and states — which was sidestepped in many previous sessions of the council was not discussed even on Monday. Kerala finance minister TM Thomas Isaac said that the at least a dozen states including Kerala remained firm on their stand that all dealers and service providers with an annual turnover below R1.5 crore should be under the states’ exclusive control. The Centre has been advocating a vertical split of the assessee base and insisted that service providers should remain under its control till the states are trained in assessing them.

The cross-empowerment issue is about how to divide the 10-million indirect tax assessee base between the Centre and states for administrative and audit purposes. An agreement had earlier been reached that there won’t be dual control on any taxpayer; that is, each business will either report to the Centre or the respective state. But if IGST administration is to be left with the Centre (as the law ministry recommended), then dual control might become necessary in cases of businesses with interstate presence. The council members hoped that the issue could be resolved by the council on Tuesday, but most of them ruled out the GST roll-out from April 1. With a constitutional compulsion to usher in the comprehensive indirect tax before September 16 this year, it seemed likely it could be implemented in June-July, they added.

Sources said the IGST draft law was discussed in detail on Monday, although the issue over territorial definition remained to be ironed out. Meanwhile, many service industries that have an interstate character like telecom, banking and insurance and railways on Monday made a presentation to the GST Council to apprise it of the desirability of allowing them a single registration (with the Centre). Officials from the commerce and industry industry said there was a need to give upfront GST exemption to exporters to spare them from the current time-consuming process of claiming refunds against the duty paid on imports of raw materials or other items. However, tax experts said this was not in line with the GST principle. Exemptions mar the input tax credit system, the incentive for businesses to be under GST and expand the tax base, they noted.

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