NEW DELHI: Finance minister Nirmala Sitharaman on Friday said that the cess on goods such as soft drinks, tobacco, coal and cars will go towards repayment of loans to compensate states for GST (goods and services tax) shortfall up to March 2026, suggesting that the demand for states to extend the compensation period was a tough ask.
Sitharaman also pointed to a study by the Reserve Bank of India (RBI), which had pegged the average GST levy at 11.5% against the revenue neutral rate of 15.5%, in what was a further indication that resources to compensate states longer than mandated were tough to come by. Over the last four years, the GST Council has cut rates on hundreds of items to provide relief to consumers.
While some of the states, such as West Bengal, demanded an extension of compensation for any revenue shortfall – which is a promise of 14% annual growth – the finance minister made it clear that the law only provided for compensation up to July 2022. Some of the states, including those ruled by Opposition parties, conceded that this was a complex issue.
The Centre presented estimates of revenue collection from compensation cess. “In this context various options, as have been recommended by various committees/forums, were presented. The GST Council deliberated at length on the issue. The GST Council decided to set up a GoM (group of ministers) to examine the issue of correction of inverted duty structure for major sectors, rationalise the rates and review exemptions from the point of view of revenue augmentation from GST,” the finance minister said in a statement.
Sitharaman also pointed to a study by the Reserve Bank of India (RBI), which had pegged the average GST levy at 11.5% against the revenue neutral rate of 15.5%, in what was a further indication that resources to compensate states longer than mandated were tough to come by. Over the last four years, the GST Council has cut rates on hundreds of items to provide relief to consumers.
While some of the states, such as West Bengal, demanded an extension of compensation for any revenue shortfall – which is a promise of 14% annual growth – the finance minister made it clear that the law only provided for compensation up to July 2022. Some of the states, including those ruled by Opposition parties, conceded that this was a complex issue.
The Centre presented estimates of revenue collection from compensation cess. “In this context various options, as have been recommended by various committees/forums, were presented. The GST Council deliberated at length on the issue. The GST Council decided to set up a GoM (group of ministers) to examine the issue of correction of inverted duty structure for major sectors, rationalise the rates and review exemptions from the point of view of revenue augmentation from GST,” the finance minister said in a statement.
While the compensation issue may not have been settled and Friday’s discussions may be a starting point, states have argued that they needed to be supported for a few more years as the coronavirus pandemic had left them cash-strapped and full recovery would take at least one more year.
The Covid-19 pandemic has forced the central government to borrow from the market to pay compensation to states, whose revenues had been hit and the 14% assured growth was tough to achieve. This has complicated the issue, while there is also realisation that states can’t be allowed to “fall off the cliff” once the current regime ends.
