GST Council may resolve compensation issue

After resolving contentious issues of threshold and dual control of central and state tax officials over assesses last week, the GST council would meet for the second round on Friday to discuss compensation to states and approve rules for registration, refunds and exemptions under the proposed indirect tax regime. A thorny issue of the GST rate and tax slabs would be decided at the three-day meeting, beginning October 17.

Broad principles for compensating states for any loss of revenue, due to the new regime, are already there. While the Centre is bound to give compensation to states for five years under the Constitution amendment Act, states want separate compensation law to provide the specifics.

In the previous meeting, three-four alternatives were discussed for compensating states. A state can be compensated if revenue under GST falls short of the average tax earnings in best three years out of past five years. Second, of the five years, two outliers are left out and average is taken. Third, a base year can be fixed and a particular growth rate for tax revenues is decided for all states. It was decided that 2015-16 could be the base year, but the final methodology and formula for payment would be worked out on Friday. The general consensus at the meeting was that the compensation should be paid to the states at regular intervals - quarterly or bi-monthly.

The finance ministry recently issued draft rules for GST registration and refunds. These are also likely to come up at the September 30 meeting.

The rules suggest that businesses would file at least three monthly returns and one annual return for each state. Monthly returns are for output supply, input supply and summary accounts and would cover state GST, integrated GST and central GST. Currently, businesses have to file value added tax returns but these are quarterly. Service tax returns are also filed only twice in a year and not state-wise.