GST Council meet: Inverted duties need to be corrected, but not now, Mitra tells FM

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March 14, 2020 12:01 AM

Even after this, the states' GST revenue (SGST) in FY20 will be some Rs 28,000 crore short of the level they would have achieved under the 14% guaranteed annual growth formula.

In fact, Sitharaman herself recently said she would prefer the GST system to stabilise before another major rates rejig. In fact, Sitharaman herself recently said she would prefer the GST system to stabilise before another major rates rejig.

Arguing against the planned move to correct the inverted duty structure in Saturday’s GST Council meet by hiking tax rates for a few mass-consumption items produced by employment-intensive sectors, West Bengal finance minister Amit Mitra told finance minister Nirmala Sitharaman that such changes could wait till the economy stabilises.

In an attempt to correct one type of error concerning the GST rates, namely inverted duty structure, the Council might end up causing further downturn in job-intensive sectors and the agrarian economy, Mitra cautioned.

Rate hikes for several items, including textiles, footwear, fertilisers, mobile phones, tractors and renewable energy devices, have been recommended by a fitment committee under the GST Council. The inverted duty structure denotes prevalence of higher taxes on inputs than on finished items. As businesses cannot use the excess ITC on inputs if their output tax liability is lower, the government ends up refunding the accumulated credits to them with estimated revenue loss of Rs 20,000 crore annually.

Mitra wrote to Sitharaman : “Markets in India are facing a double whammy with stagflation on one hand and the looming effects of the coronavirus outbreak on the other. The latter is crippling many economies across the world and is beginning to affect supply chains and consumer spending in India as well…. May I urge you not to make changes in the rate structure during these perilous economic times, particularly keeping in mind the interest of the common people.”

Despite admitting that the inverted duty structure is creating a set of problems, Mitra questioned whether the proposal for tax hikes should be acted upon right now, given that most businesses, especially MSMEs, are in dire straits.

In fact, Sitharaman herself recently said she would prefer the GST system to stabilise before another major rates rejig. However, while a comprehensive overhaul of rates or GST slabs convergence might be deferred to a future rate – there is a view that aggregate GST rate being lower than the ‘revenue-neutral’ level is one reason for lower-than-expected GST revenues – the correction of inverted duties at the current juncture is apparently being supported by a number of states.

The Centre recently said it will use about Rs 28,000 crore of Rs 47,271 crore absorbed by the Consolidated Fund of India in FY18-FY19 as ‘surplus’ revenue from the GST compensation cess to reduce the state governments’ GST revenue shortfall in FY20. Even after this, the states’ GST revenue (SGST) in FY20 will be some Rs 28,000 crore short of the level they would have achieved under the 14% guaranteed annual growth formula.

In her latest Budget speech, Sitharaman said: “It is decided to transfer to the GST compensation fund balances due out of collection of the years (2017-18 and 2018-19), in two instalments. Hereinafter, transfers to the fund would be limited only to collection by way of GST compensation cess.”

Some states are threatening to move the Supreme Court against the Centre’s decision. Kerala finance minister Thomas Isaac said the state government would approach the apex court under Article 131 to secure the pending GST compensation from the Centre. Even Mitra had said it was for the Centre to devise a mechanism for payment of compensation to states under GST, if the fund set up for the purpose ran dry, given the silence of the relevant law on an alternative mechanism.

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