Extend compensation period or raise GST mop-up share.

States are concerned about their finances as the five-year protection against any revenue shortfall will end after June 30.

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GST mop-up share

Even as the GST Council on Tuesday agreed on a slew of measures to reduce the compliance burden and rationalise tax rates, several states have urged the Centre to either extend the five-year revenue compensation period beyond June 30 or substantially raise their share in the goods and services tax (GST) collections.

States are concerned about their finances as the five-year protection against any revenue shortfall will end after June 30. The people, who asked to remain anonymous, claimed that opposition-ruled states like Delhi, Punjab, and Kerala are more vociferous about it.

“While Chhattisgarh has sent a letter to the chairperson in this regard, West Bengal has cautioned that the Centre must respect the views of all member states in the spirit of cooperative federalism,” one person said.

Minister TS Singh Deo of Chhattisgarh said in a letter to the GST Council’s chairperson and finance minister Nirmala Sitharaman that the state“suffered huge revenue losses” under the GST regime, which were made up for by the already in place compensation mechanism.

He proposed, in a letter dated June 27, “either continue with the % protected revenue” clause or give the states a bigger piece of the revenue pool. “If the protected revenue provision is not extended, then the 50/50 CGST/SGST formula should be altered to SGST 80-70% & CGST 20-30%.” Due to a positive Covid test, he was unable to attend the meeting.

At the time of its launch on July 1, 2017, the GST law assured states a 14% increase in their annual revenue for five years, and also guaranteed that their revenue shortfall, if any, would be made good through the compensation cess levied on luxury goods and sin products. The legally binding five-year period of compensation will end on June 30 unless extended by the ongoing 47th GST Council which will conclude on Wednesday.

Amit Mitra, a former finance minister for the state of West Bengal and the chief adviser to the chief minister of that state, wrote to Sitharaman on June 28 to inform her of a recent Supreme Court decision stating that the council’s recommendations are not binding on its members. The state’s FMs are members of the GST Council, which is presided over by the union’s finance minister. In light of the Hon. Apex Court’s “very significant observation,” he wrote in the letter, “it has become exceedingly important for the GST Council to always arrive at a consensus before taking any decision.” He had already written to Sitharaman on June 11 to request an extension of the compensation period of three to five years. On June 25, HT reported the same.

The second person said the matter related to compensating states for their revenue shortfall beyond the initial five-year period could be taken up at the council’s meeting on Wednesday. “Besides, several decisions have been taken on Tuesday that pertain to better GST administration that includes biometric authentication and auto-population of data, ease of compliance, removal of unnecessary exemptions, and corrections in duty structure. The finance minister [Sitharaman] will announce them after the meeting concludes tomorrow,” he said.

According to one of those listed above, the council adopted the preliminary report of a group of ministers (GoM) on Tuesday, which recommended rationalising taxes on a variety of goods and services to eliminate duty inversion and removing exemptions to increase GST income. “A definitive decision on each thing may be made tomorrow,” he said. On the majority of pre-packaged curd, lassi, wheat, and puffed rice, the GoM proposed a % GST. Food products that are branded and packed already have a % GST. Additionally, it suggested reversing the duty structure on many products, including edible oil, coal, LED lights, printing ink, completed leather, and solar water heaters. It also recommended withdrawal of exemption on hotel rooms below ₹1,000 per day and bringing it under the 12% slab.

Pratik Jain, the partner at consultancy firm Price Waterhouse & Co. LLP, said: “The GoM report is likely to focus on correction of inverted duty structure and reduction of exemptions wherever possible. It appears that enough deliberations have not happened on rationalization of rate structure and possible realignment of slabs from four to three. Given the current situation of inflation, the government would want to ensure that the incidence of tax is not increased on items of mass consumption. Larger stakeholders’ discussion is perhaps needed on this.”

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