Compensation Cess | States’ GST deficit: Centre will borrow in FY22 too

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May 29, 2021 4:15 AM

Revenue secretary Tarun Bajaj said since the government (Centre and states) were themselves the biggest buyers of these items and the GST also accrue to its coffers and given that vaccines are anyway made available to people free of cost by the government, the utility of the tax cuts were debatable.

The GOM will submit its report to the GST Council by June 8 for the Council's consideration.

For the second year in a row, the central government will borrow under a special, relatively low-cost mechanism to bridge a yawning shortfall in the GST compensation cess pool and transfer the funds to states as back-to-back loans, sans any consequent fiscal cost to states.

While this decision was taken at the Goods and Services Tax Council meeting on Frida, it left the question of tax cuts/exemptions on Covid vaccines and assorted other items for management of the disease to a Group of State finance ministers. The group will submit its report by June 8.

While the amount borrowed under the RBI-enabled mechanism last year was Rs 1.1 lakh crore — there was still a shortfall, up to Rs 70,000 crore by one estimate — the idea is to borrow some Rs 1.58 lakh crore in FY22.

This is based on the assumption that if the gross GST receipts in the year is Rs 1.1 lakh crore/month or Rs 13.2 lakh crore in the year, the borrowed amount would suffice to not only address the deficit in the cess kitty for the current year, but would make available some amount to make good a part of last year’s unbridged shortfall.

If the monthly collections average at Rs 1.15 lakh crore, then a larger part of last year’s unpaid bill could be settled over this year and the next.

Finance minister Nirmala Sitharaman said a GST Council meeting would be convened to exclusively discuss whether the compensation cess – levied on assorted demerit goods including tobacco, aerated drinks, etc, – would need be extended beyond July 2022 and if so how and for how long. Under the GST compensation law, states are guaranteed 14% annual growth in their state S-GST revenue for five years beginning July 2017.

In recent months, GST collections have been robust thanks to increased formalisation of the economy, a nascent economic recovery that lasted until the second Covid wave and concerted efforts to check evasion. In the January-April period, the average monthly mop-up was an impressive Rs 1,24,576 crore. Of course, the collections are seen to have taken a big hit in May (April transactions) and June (May purchases), and probably the impact of the lock-down could linger through the July-August period as well.

The government is planning to impose cess on demerit goods like pan masala and gutka to the installed manufacturing capacity (rather than on production as at present), a move that is expected to boost cess proceeds.

The Council decided to extend IGST exemptions till August 31 (from June 30-) for Covid related materials procured by state approved agencies. IGST exemption has also been extended to Covid-related goods even if imported on payment basis by approved agencies.Black fungus medicine Amphotericin B also included into the exemption list.

On the demand for reducing GST rates or giving exemptions to Covid vaccines, and assorted other equipment for Covid treatment and management, the minister said “If there are any further reductions, which need to be done, (those) will be done; in the sense the rates will be decided by the (panel). So, in a way, the exemptions that we had given had been given, but any new rates will now be decided by them”.

Revenue secretary Tarun Bajaj said since the government (Centre and states) were themselves the biggest buyers of these items and the GST also accrue to its coffers and given that vaccines are anyway made available to people free of cost by the government, the utility of the tax cuts were debatable.

Earlier, the fitment panel had recommended continuation of the process of correcting inverted rate structures that dented the government revenue. The proposal to correct the inversions in regard to GST rates on footwear, ready made garments and fabrics and their inputs such as man-made fibres and yarns, would be taken up later, the minister said.

An amnesty scheme has been recommended for reducing the late fee payable by small tax payers. Under the scheme, late fee for non-furnishing Form GSTR-3B for the tax periods from July, 2017 to April, 2021 has been reduced / waived. About 89% of the GST taxpayers would benefit from the move.

Also, late fees have also been rationalised and annual return filing has been simplified further. A decision to reduce maximum amount of late fee for small taxpayers would come into effect for the future tax periods, and would provide a long term relief to smaller taxpayers, the minister added. Annual return filing will continue to be optional for financial year 20-21 for small taxpayers having turnover less than Rs 2 crore.

Currently Covid vaccines attract 5% GST for domestic supply and commercial import, the fitment committee is learnt to asked for retaining the rate. As for oxygen concentrators, medical grade oxygen, pulse oximeters and Covid testing kits, 12% GST exist on domestic supplies and commercial imports. The committee favoured cutting the rate to 5% till July 31.

No change in rates was recommended by fitment committee on ventilators (12%), N95 mask/surgical masks (5%), RT-PCR macines (18%).

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