Compensation To States Remains Unfinished Business For The GST Council

The seventh GST Council meet saw the Centre and the states agree on the compensation law detailing that the Centre will absorb any spillover of revenue losses accruing on account of the adoption of the new indirect tax regime.

But hurdles in the implementation of the Goods and Services Tax are far from over. Inter-state trade, dual control and the quantum of compensation remain unresolved issues, according to West Bengal Finance Minister, Amit Mitra.

Compensation Back On The Table

The earlier three-day discussion on compensation had taken place before the demonetisation decision was announced. It was estimated, given only a few large states would need compensation, that in the first year the Centre would pay states Rs 55,000 crore raised through the levy of cesses. But now, after the demonetisation or invalidation of Rs 500 and Rs 1,000 notes and the ensuing cash crunch, states expect tax revenues will be hit by 30 - 40 percent and hence the compensation amount needs revisiting, said Mitra. He expects the compensation amount to increase to Rs 70,000 - 80,000 crore in the first year.

According to discussions at earlier meetings of the GST Council, the Centre will impose a cess on luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, over and above the highest tax slab of 28 percent. These cesses would add up to Rs 55,000 crore, and it was decided that this amount would be used to compensate states for their revenue collection shortfall.

Mitra said, with the quantum of compensation set to rise, the Centre must look at additional routes to fund it, such as the Consolidated Fund of India, and the matter will therefore come back to the Council for further discussion.

Indirect tax expert Amit Sarkar said while the states will forego a large chunk of the tax collection once GST is rolled out, the implementation of the indirect tax regime will increase the total collection.

“If there is a request for higher compensation due to the adverse effect of demonetisation in the economy, it is important to note that it is the very same economy where the central government itself would be collecting taxes. So, the question arises where will that money come from?” Sarkar said.

Finance Minister Arun Jaitley said that the compensation due to the states will be paid every two months.

The compensation law, which was cleared on Friday, states that the Centre would compensate states for five years if they incur losses post the implementation of GST. The revenue growth rate that would be considered to arrive at the compensation amount would be 14 percent, and the base year would be kept as 2015-16.

Cross Empowerment

The contentious issue of cross empowerment which is a part of the Integrated GST will be taken up for discussion in the GST Council's next meeting on January 3 and 4.

The Centre and the states are yet to arrive at a consensus on the division between the two authorities. States have maintained their demand for exclusive control over assessees with a turnover up to Rs 1.5 crore, but the Centre is yet to concede.

The Centre has also said that while empowering the states, it cannot afford to disempower itself by giving the states exclusive control over such assessees.