Eight Opposition-ruled states on Friday demanded that all states be compensated for five years, for an estimated Rs 2 lakh crore/year revenue loss they might incur as a result of the proposed slabs restructuring of the Goods and Services Tax (GST).
Addressing the media here, ministers from Karnataka, Himachal Pradesh, Jharkhand, Kerala, Punjab, Tamil Nadu and Telangana, as well as a representative of the West Bengal government, also asked for a mechanism to guard against profiteering by businesses post the tax cuts to ensure the benefits accrue to the common man.
The states suggested that an additional duty be levied on sin and luxury goods in addition to the proposed 40% rate to maintain the current tax incidence. Part proceeds from this levy should be fully distributed among states to compensate them for revenue losses. If required, some additional duty can also be levied on sin goods, they said.
Proposed GST overhaul and states’ concerns
These states will present their proposals before the GST Council, chaired by the Union finance minister Nirmala Sitharaman and comprising all state ministers, at the September 3-4 meeting. The Centre is keen that the reforms are implemented by mid-September so that the consumers get the benefit of it in the coming festive season.
Apart from streamlining the multiple slabs under GST into a two-pillar structure of 5% and 18%, the proposal intends to levy a special rate of 40% on sin and luxury goods. The existing rates of 12% and 28% will be abolished.
The Centre hasn’t given an estimate of the revenue loss due to the rates rationalisation.
Karnataka finance minister Krishna Byre Gowda said each state is expected to lose 15-20% from its current GST revenue and debunked the claim that tax revenue buoyancy will increase after the rate cut.
Compensation and profiteering
“The 20% GST revenue loss will seriously destabilise the fiscal structure of state governments across the country,” Gowda said, adding that states should be compensated for 5 years which may be extended further till the revenues stabilise.
When GST was implemented, the revenue-neutral rate (RNR) was 14.4%, but subsequent tax rate rationalisation has brought the net rate of taxation down to 11%, which Gowda said could further fall to around 10%.
“Revenues have declined from 6.1% of GDP during the pre-GST period to 5.9% after GST was implemented, despite initial expectations of increased revenue. Rate reductions have led to significant revenue losses,” Gowda said
He further said “reasonable estimates” suggest the likely revenue loss from the proposed rate rationalisation at Rs 1.5-2 lakh crore.
“If there is a serious loss to state government revenues, people will be impacted, development work will be impacted and insufficient revenue will hurt state autonomy as well,” Gowda said.
With the proposed GST rate rationalisation, Telangana is estimated to lose Rs 7,000 crore annually, Telangana deputy chief minister Bhatti Vikramarka said and asked the Centre to properly compensate states for the losses expected from the new tax measure.
Himachal Pradesh technical education minister Rajesh Dharmani said, “We agree to the proposal of rate rationalisation, but we should be compensated as well.”
Kerala finance minister K N Balagopal said rate rationalisation should happen, but states’ revenue will have to be protected, and the benefits should go to the common man. “The additional levy that will replace compensation cess should be used to compensate states for their revenue loss due to the proposed rate cuts,” Balagopal said.
Punjab finance minister Harpal Singh Cheema also demanded that a mechanism be set up to detect profiteering so that the benefits of rate rationalisation reach the common man.
“Since the GST rollout in 2017, tax rates have been rejigged 15 times, but all states are facing revenue loss,” Cheema said, adding that the benefit should not be pocketed by large companies.
Tamil Nadu finance minister Thangam Thennarasu said that the compensation should be given to all the states for likely losses due to the rationalisation exercise. The states’ revenue interest has to be protected.
Ministers of the eight states will meet again on September 2, demanding that the base year for calculating revenue protection be fixed as 2024-25 and that states’ revenues be protected at 14% growth annually, which is the average growth rate of the preceding three years.
To meet the resource gap of the states due to the short release of compensation, the Centre borrowed and released Rs 2.69 lakh crore in 2020-21 and 2021-22 as back-to-back loans to meet a part of the shortfall in cess collection on sin goods. This loan was to be repaid by March 2026, but it is likely to be repaid by November this year.
The GST Compensation to States Act provides for the release of compensation against 14% year-on-year growth over revenues in 2015-16 from taxes subsumed in GST. The compensation ended in 2022.
“Should there be a deficit even after the imposition of the proposed additional levy (on sin and luxury goods), the union government should raise loans secured against the future receipts of the additional levy,” the eight states said in a statement.