GST Council may allow intra-state pharma cess, discuss states' dues

The Goods and Services Tax Council meeting on Friday, the first physical meeting in more than 20 months, will deliberate on levying the Covid cess on pharmaceuticals and the power sector for intra-state supplies in Sikkim besides extending the states compensation period beyond 2022.

The meeting, being held in Lucknow, may take up notifying a common comprehensive e-portal gst.gov.in for registration, paying tax, and filing returns. Chaired by Union Finance Minister Nirmala Sitharaman, the 45th Council meeting will be the first one taking place outside New Delhi in two years.
 

The Group of Ministers (GoM), led by Karnataka Chief Minister Basavaraj Bommai, has backed Sikkim’s proposal for a 1 per cent cess on intra-state supplies of pharmacueticals for two years. It has endorsed a special aid of Rs 300 crore per annum till 2023 for Sikkim by the Centre to overcome Covid-related losses.

However, with electricity being outside the GST purview, the GoM has recommended the state independently explore the proposal of Rs 0.1 (10 paise) per unit of electricity consumption or sale.

It may discuss extending the compensation cess for states beyond 2022. Most states are likely to pitch for an extension by another five years, amid several fiscal constraints. While the Centre may agree to extend the compensation period, it will press for lower assumed revenue growth as against the 14 per cent at the moment, arguing that it may not be sustainable.

States were promised compensation for five years after GST implementation in July 2017 revenue shortfall assuming a 14 per cent annual growth, since states lost autonomy over indirect taxes. Compensation cess is levied on a few items in the 28 per cent GST slab, such as automobiles, cigarettes, and aerated drinks.  

Aditi Nayar, chief economist, ICRA Ratings said that there was a clear case for extending compensation for states as Covid-19 has dealt a blow to state finances. "Stopping compensation in three quarters will be a structural shock for state finances. But, at the same time the assumed growth rate for protected revenues should be more realistic for it to be sustainable," said Nayar.

Devendra Kumar Pant, chief economist, India Ratings said that the 14 per cent growth was fixed at a time when both economic growth and tax collections were more buoyant from what they were currently. “...Personally, a buoyancy of 1.1x along with a minimum threshold of 8 per cent or a different combination where compensation is based on collection rather than a fixed annual growth could be discussed in GST council," said Pant.

The Council will also provide clarification on the interest levied on wrongful or ineligible input tax credit claims, in accordance with the agenda circulated on Sunday. It may address the steel sector’s problems with manufacturers facing enforcement action including blocking input tax credit and supply-side disruption due to fake invoicing by the scrap dealers. The Council may consider rationalising the GST rate on steel scrap from the current 18 per cent.

The Council may review concessional rates on pandemic-related essentials like medicines, oxygen, and medical kits beyond September 30, 2021, amid fears of the third wave looming large.

It is also likely to discuss the way forward for rate rationalisation and correcting the inverted duty structure on textiles, footwear, etc and bringing petroleum products like aviation turbine fuel and natural gas within GST.

The fitment committee, which recommends rate changes to the Council, has likely proposed increasing the rate on footwear (less than Rs 1,000), readymade garments, and fabrics to 12 per cent from 5 per cent now. For inputs like manmade fibre and yarn, the panel has likely proposed reducing the rate to 12 per cent from 18 per cent to correct the distortion.