GST Council may be asked to decide on compensation to states in 45 days

The Fifteenth Finance Commission (FFC) is likely to ask the Goods and Services Tax (GST) Council in the meeting on Friday to decide on the issue of extension of compensation to states within the next month and a half to help the panel make a realistic projection of revenue in its report, which is expected by November.
 
States have been strongly pitching for extension of the compensation period by three years to 2024-25.
 
However, the Centre might oppose any such move in view of the weak revenue situation, where collections are failing to grow by 14 per cent, which was promised to states to decide the compensation requirement.
 
In case the states’ revenues do not grow by this rate on the base year of 2015-16, they would be compensated from the cess imposed under the GST system or the Centre’s funds.
 
FFC Chairman N K Singh will meet state finance ministers before the GST Council meeting on Friday.
 
Incidentally, cess collections under the goods and services tax (GST) to compensate states for the revenue loss has fallen short of requirements in the first five months of the current fiscal year on account of slowdown in demand. Compensation cess is levied on a few items in the 28 per cent GST slab, such as automobiles, luxury cars, cigarettes and aerated drinks.
 
A final call on the matter will have to be taken by the GST Council, which comprises states and Union finance ministers.
 
“The finance commission will likely press states to have a decision on the matter before the report is finalised by November. It will help the panel make realistic revenue projections for the next five years,” said an official source.
 
“Revenue growth assumptions of 14 per cent annually was very high. If states want an extension in compensation cess period, they should be ready to accept a realistic growth assumption,” said a government official.
 
There is a shortfall of around Rs 24,000 crore between the GST compensation cess collected till August and compensation disbursed to states to meet revenue shortfall. Slowdown in the auto sector has contributed to the bleak compensation cess collections.
 
States were promised a compensation for 5 years since GST implementation to make up for revenue shortfall, if any, since states lost autonomy over indirect taxes.
 
“Extension of compensation period would work if petroleum is included in GST. The Centre also needs revenue to be able to compensate states,” said another government official. States have in the past not agreed to inclusion of petroleum products in GST, as they don’t want
to lose their autonomy on a big revenue contributor.
 
Around Rs 41,000 crore has been collected as compensation cess till August, as against Rs 65,000 crore worth of disbursements to states. The shortfall is being met by the surplus pool of the previous fiscal.
 
Pratik Jain, partner, PwC India, said, “It might be unrealistic for states to expect that the Centre would agree to compensate the states with assumption of 14 per cent minimum annual growth. In the long run, states will have to find a self-sustaining model.”
 
The effects of the current slowdown on the revenues and the fact that the central government is required to compensate states for any revenue shortfall would be key factors that would be considered by the GST Council, said M S Mani, partner, Deloitte India.