GST Council meet may turn stormy over states' cess; Rs 50k-cr dues pending

The Centre has, so far, not given any definite timeline for making the pending compensation cess payments to states, thereby triggering a face-off between the two sides

The compensation cess payment issue is not part of the official agenda circulated for the Goods and Services Tax (GST) Council meeting on December 18, and that precisely is setting the stage for a stormy show. 

Sources in the know said finance ministers (FMs) of non-Bharatiya Janata Party (BJP)-ruled states were likely to discuss on Monday their strategy for the Council meet. Some were already suggesting a walk-out if the Council failed to take up the compensation issue on Wednesday. 

In the absence of any meaningful discussion on compensation, there may not be any decision on GST rate revision, one of the FMs told Business Standard. 

So far, the Centre has not given any definite timeline for making the pending compensation cess payments to states, thereby triggering a face-off between the two sides.

Meanwhile, the revenue augmentation committee will give a presentation suggesting measures to broaden the tax base, additional resource mobilisation, and improved tax compliance to improve collection. It will likely recommend correction of the inverted tax structure in key items, revising slabs, raising cess on a few items, among others.

Around Rs 50,000 crore compensation dues of states are pending, causing huge distress to state finances, a state FM argued. Even BJP-ruled states raised eyebrows over FM Nirmala Sitharaman’s response to the compensation cess issue in the Rajya Sabha last week, where she had said the Centre had released more than what it had collected as cess in 2019-20 (FY20) till October-end. 

Till October 31, the Government of India had released Rs 9,783 crore more than the amount raised through cess, she had said. “How is it possible? What about the surplus cess of the previous two years? Is the FM trying to say the Centre has given extra money to states from the Consolidated Fund of India?” asked a BJP-ruled state FM.

Under the law, if states’ GST revenue does not grow by at least 14 per cent, the Centre pays them the difference, after every two months.

The agenda paper for the meeting has drawn up reasons for the slowdown in GST collection, blaming it on frequent rate rationalisation and rates going below the 15-per cent revenue-neutral rate recommended by former chief economic advisor Arvind Subramanian. Besides, higher exemption and composition scheme limits are listed as reasons impacting revenue.

“A detailed presentation examining reasons for the current slowdown in collection and measures to address this will be given by the revenue augmentation committee. The discussions on revision in rates will take place after that,” said the official.

The need for relooking at GST slabs arose as the cess collection under GST has fallen short of the requirement to meet states’ compensation requirements. About 34 items falling in the sin and luxury goods are taxed at 28 per cent and additional cess is levied on a few items in the 28-per cent GST slab, such as automobiles, cigarettes, and aerated drinks, which goes to compensate states for the revenue shortfall.

For the automobile sector, the cess ranges from 1 per cent for small cars to 22 per cent for sport utility vehicles. Kerala and Punjab have threatened to move the Supreme Court (SC), challenging the non-payment of dues. “If the compensation issue is not resolved in the GST Council meeting, we will move the SC,” Kerala FM Thomas Isaac had told this newspaper last week.

This year, in the first six months, while the Centre collected compensation cess amounting to just above Rs 46,000 crore, the compensation actually released to states has run into Rs 66,000 crore, for which the surplus of the previous year was used.

Rajasthan’s outstanding compensation dues for August and September stand at Rs 4,400 crore, Punjab’s at Rs 2,100 crore, Delhi’s at Rs 3,600 crore, Madhya Pradesh (MP) Rs 3,000 crore, Kerala’s Rs 1,600 crore, and West Bengal Rs 1,500 crore.

MP has fared the poorest in GST collection in FY20, raking in 30 per cent of the annual target. Kerala, Punjab, and Tamil Nadu have collected about 33 per cent, the data on the Comptroller and Auditor General of India website shows.

Acknowledging that the compensation requirements of states will ‘unlikely’ be met from the cess collected, the government has written to states, seeking suggestions for revenue augmentation, which could be discussed in the next GST Council meeting.

Some states, including Kerala and Punjab, are considering moving the SC if Centre does not resolve the issue on December 18.

This monthly compensation requirement of states stands at Rs 15,000-16,000 crore, against a collection of Rs 7,000-8,000 crore through a cess on sin and luxury goods. The requirement is expected to go up in line with the slowing consumption and falling gross domestic product growth.

Besides revenue augmentation measures, the GST Council will discuss issues like GST on lottery and review GST e-way bill system and FASTag implementation, new return system, integrated refund system with disbursement from single authority, and electronic invoice. The proposal on creation of the public grievance redress committee is also on the agenda.

“In the last GST Council meeting, Union finance commission chairman suggested that states should revisit the compensation package in the context of decline in tax collection. All state ministers, irrespective of politics, rejected it. Now the Centre is bringing it back by forcing a dispute,” said Isaac in a tweet.

After plummeting to a 19-month low in September at Rs 91,916 crore, GST collection recovered to Rs 1.03 trillion in November, posting 6 per cent year-on-year growth on the back of festive demand. Despite that, collection is lower than the rate needed to meet the steep target for FY20.