States are right in pushing the Centre to pay their dues on a timely basis, but they would also need to look at other measures to increase tax revenue.
The last couple of months have seen much debate between the Centre and the states, wherein the states, especially the opposition-ruled ones, have been complaining about the non-release of compensation cess by the Centre. It is crucial to understand what exactly the compensation cess is.
Compensation cess was introduced as a relief for the loss of revenue states would incur due to the implementation of GST. Since the states have given up their powers to collect certain taxes on goods and services, they were guaranteed a 14% tax revenue growth in the first five years after GST implementation. The compensation cess was to be provided to states till July 1, 2022. States’ tax revenue as of FY16 was taken as the base year to calculate this 14% growth. Any shortfall was supposed to be compensated by the Centre, using funds specifically collected as compensation cess.
Under GST law, compensation cess is levied over the 28% GST on luxury cars, and demerit goods like aerated drinks and tobacco. Further, the compensation cess is not payable by exporters and those who have opted for compensation levy. States are required to be compensated bi-monthly from the accumulated funds in this account.
During these past months, there has been a hue and cry by various states—Delhi, Punjab, Kerala, and West Bengal, to name a few—regarding the release of compensation cess for the months beginning August, 2019. In the first year of GST implementation, FY18, the compensation cess collection was Rs 62,596 crore, out of which Rs 41,146 crore was paid to the states. The remaining value was accumulated. In the subsequent year, collection from compensation cess was Rs 95,081 crore, and Rs 69,275 crore was released to states.
In the current fiscal, the government has already collected cess of Rs 55,467 crore till October 31, 2019, just 1.5% more than what was collected in the same period last year. In fact, just two days before the GST Council meeting on December 18, the Centre had released Rs 35,298 crore to the states and union territories. FM Nirmala Sitharaman has assured that the Centre will not back out on its promise of GST compensations. The delays in passing on the money to the states are due to slippage in collections under GST.
Given that the states have a constitutional right to the compensation, they tend to be complacent in trying to collect GST revenue. The states should support the Centre in the implementation of GST to curb tax evasion. This will ensure that the government’s tax revenues—and, therefore, automatically that of the states—go up. For example, the decision, taken in the recent GST council meeting, to block the e-way bill facility on non-filing of two consecutive GSTR-1 returns should definitely go a long way in increasing tax compliance. Similarly, a standard operating procedure, with regard to action to be taken on non-filing of GSTR-3B (monthly tax return), will be issued for tax officers. States need to ensure that state tax officers implement such measures diligently, so that the tax revenue collections of both the central and state governments increase.
In addition, states also need to look at other measures to increase tax revenue in their respective territories. Besides the effective implementation of the recent proposals of the GST council meeting, states should support the Centre on other critical proposals such as e-invoicing to curb the fraudulent availment of input tax credit. Also, states should take a cue from the Centre and introduce amnesty schemes under VAT/ Entry tax, so that any blocked revenues that are under litigation would also flow into their coffers. These measures will also help the states reduce dependency on the Centre.
The recent GST council meeting saw certain interesting suggestions given by the states to the Centre to ensure timely release of funds to the former. One of these, was that the Centre should give a share of cesses and surcharges, including the super-rich tax levied on people earning over Rs 2 crore a year to the states. While states already get a 42% share in the Centre’s tax revenue, they do not get a share of the surcharges and cesses levied for specific purposes. While all these concerns voiced by the states are valid, it is only a matter of time, i.e., till July 1, 2022, before the states will need to stand on their own feet to meet their tax revenues.
To conclude, while the states are right in pushing the Centre to pay their dues on a timely basis, they would also need to look at other measures to increase tax revenue.