Government Plans To Review Compensation Cess, GST Rates

The government is planning to review compensation cess and goods and services tax rates to boost revenues from indirect taxes, according to an official who spoke on condition of anonymity.

In a letter to state GST officers, the central government has sought suggestions from states to increase GST revenues. This is being done when compensation to states has increased ‘significantly' and is unlikely to be met through compensation cess collections, said the letter—a copy of which has been reviewed by BloombergQuint.

The central government compensates states bimonthly for any shortfall they incur in the first five years of the implementation of GST considering a 14 percent growth in subsumed indirect taxes, and keeping 2015-16 as the base year. Although, the government is collecting compensation cess levied on sin or luxury goods, it has not compensated states for August-September. Now, compensation to states for October-November is due too, and the government will have to release that in December.

If the GST Council, the decision-making body for GST-related changes, decides to increase compensation cess on items such as pan masala, cigarettes, coal, aerated water and motor vehicles above the threshold set for individual items, the GST (Compensation to States) Act, 2017 will have to be amended. The Act has a provision to levy compensation cess up to 15 percent on any other item on which compensation cess is not levied currently. GST (Compensation to States) Act specifies that compensation cess can be levied for five years from July 2017.

Last month, some states complained that they hadn't received the compensation cess from the central government, which they said was impacting their finances.

On Wednesday, a few states again met Union Finance Minister Nirmala Sitharaman to discuss the issue of GST compensation. About Rs 50,000 crore is lying in compensation cess fund as of now, Delhi deputy Chief Minister Manish Sisodia said after the meeting. According to Punjab Finance Minister Manpreet Singh Badal, though Sitharaman did not give a timeline when the funds from the central government will be released, she has assured that the money will disbursed soon.

Compensation cess collected till Oct. 30, according to Comptroller General of Accounts, stood at Rs 55,467 crore against Rs 54,662 crore a year ago. The government expects to collect Rs 1.09 lakh crore from compensation cess in 2019-20, according to budget documents. In 2017-18, the central government had compensated Rs 48,171 crore to the states, and Rs 48,202 crore during April-December 2018 period, according to a response given by the government in Parliament.

The government is also considering to rationalise GST rate structure to three slabs, BloombergQuint had reported. A panel of officers was constituted to suggest ways to augment GST revenues after the collections had fallen to a 19-month low of Rs 91,916 crore in August. The collections picked up to Rs 95,380 crore in September, and crossed Rs 1 lakh crore in October. The panel is yet to submit its report to the government.

GST revenue will be discussed in the next council meeting which will be held in the second fortnight of December, the letter said. “The discussion is quite critical as lower GST and compensation cess collections have been a matter of concern in the last few months.”

The states have also been asked to send their suggestions for reviewing the items that are currently exempted under the indirect tax regime. Inverted duty structure—that taxes inputs at a higher rates than outputs—will also be looked at. Currently, businesses cannot adequately utilise their input tax credit if their raw materials are taxed at a higher rate than their finished products.