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States’ GST revenue deficit to disappear in 3 years

Planned rates rejig to raise average rate to RNR, says CBIC chairman

States’ GST revenue deficit to disappear in 3 years
The shortfall of GST revenue for states from the protected level of the last five years will come down to about 15% in FY23 from 27% in FY22, before achieving the the desired growth of 14% by the third year from now, Johri said.

The recent measures to reduce exemptions, correct inversions and the upcoming slabs rejig will ensure that revenue shortfall of the states will be overcome in three years, the Central Board of Indirect Taxes and Customs (CBIC) chairman Vivek Johri said. These changes will increase the weighted average GST rate from about 11.6% now to the revenue neutral rate of 15.5% during this period, he told FE.

The shortfall of GST revenue for states from the protected level of the last five years will come down to about 15% in FY23 from 27% in FY22, before achieving the the desired growth of 14% by the third year from now, Johri said.

On June 29, the GST Council removed a host of tax exemptions and raised rates for a larger number of mass-consumption items to remove anomalies and inversion, which would yield about Rs 1,000-1,500 crore extra revenues a month. Monthly GST collections averaged Rs 1.51 trillion the first quarter of FY23. However, the group of ministers (GoM) on slabs rejig has been given three more months to give its final report.

“In three years time, the revenue neutral rate should be where we expected it to be which is around 15-16%. Eventually, some rates will go up but eventually that is where the standard rate will settle and that is where also the revenues also stabilize,” Johri said.

However, the official said the Centre and states are conscious of the inflationary pressures, so the timing of slab rejig would have to worked out keeping that in mind.

So, the most tricky part of this exercise is the timing when do you implement the GoM report is expected in three months time they will apply their minds to what the three rate should be.

“It may not be so difficult to arrive at the three rates (from four rates of 5%, 12%, 18% and 28%). It’s a more difficult exercise to define which items should go into which slab. So that fitment is where we expect a lot of discussion and deliberation will need to happen.

“ The timing is the more tricky part because of the inflationary expectations in the economy as there is no escaping from a rate increase for some of the items… the Council may also want to do it in a phased manner.”

The Centre has come under greater pressure to provide some relief to the state governments that are staring at a revenue shock, with many BJP-ruled states also joining the chorus for extension of the GST compensation mechanism. A five-year, constitutionally guaranteed compensation ended on June 30. Under the mechanism, the Centre provided for the release of compensation against 14% year-on-year growth over revenues in 2015-16 from taxes subsumed in GST.

All-India average revenue shortfall from the protected level declined to about 27% in FY22 from about 38% in FY21 and it may come down to 15% in FY23, the official said.

After the GST was implemented from July 1, 2017, it gave a compounded annual growth rate about 10-11% till FY22, which is lower than the 14% that was promised.

“If the current (revenue growth) trend continues, then I think in about two to three years time we would have achieved the CAGR of 14%,” Johri said. The gross GST collections grew by 30.5% on-year in FY22 and has grown by 37% on year in Q1FY23.

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