States likely to ask for five-year extension of GST compensation

Tax sops on Covid supplies to also be on agenda at Council meet

States might seek an extension of up to five years on protected revenues beyond June 2022 at the upcoming Goods and Services Tax (GST) Council meeting, which will take place on Friday after a gap of over seven months.

Besides, states will also pitch for a cut in GST rates on key Covid-19-related medical supplies. However, the Centre appears averse to both the demands on grounds of feasibility.

The Council, chaired by Union Finance Minister Nirmala Sitharaman, may also take up reduction in late fees for late filing of GSTR 3B returns since July 2017, which may be seen as an amnesty scheme to clean up pendency in return filing. Other agenda items include converting quarterly filing and monthly payment for taxpayers with a turnover of less than Rs 5 crore to quarterly returns and payments. It will also discuss levy of Covid Cess on pharmaceutical and power sector in Sikkim.

States have also been asked to provide manpower to the GST Network with SGST experience for smooth functioning of the IT backbone. The Council may also take a call on the levy of 12 per cent GST on import of oxygen concentrators for personal use, following the Delhi High Court’s verdict last week that the levy was “unconstitutional”, pointing out that oxygen concentrators are life-saving devices during the pandemic. 

Chhattisgarh Health Minister TS Singh Deo, who represents the state at the Council, said he will raise the issue of extension of GST Compensation period. He added that he will also pitch for exemption of GST on Covid-related medical supplies.

“The projected income for states should be extended for another five years. When the GST Council was constituted, it was assumed that states will become self-reliant in five years and won’t need compensation. But it hasn’t worked out like that. The economy has slowed down,” said Deo.

A Union government official said extending GST compensation may not be feasible as it is resorting to market borrowing to make up for last year’s cess shortfall. “Besides, 14 per cent annual growth rate in revenue is not realistic, it is too high,” said the official.

Besides extension, states will discuss measures to meet higher compensation requirement arising due to the second wave. West Bengal Finance Minister Amit Mitra had recently flagged this concern. “Compensation period must be extended beyond 5 years as states are already struggling with finances,” said a WB state government official.

Economists estimate the shortfall at Rs 1.5-2 trillion in 2021-22, compared with Rs 2.35 trillion in the previous year, which accounts for the impact of the pandemic and GST implementation.

States were assured of a 14 per cent increase in their annual revenue for five years (up to 2022) and any revenue shortfall would be met through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal, and tobacco.

Several states, including West Bengal, have written to the Centre seeking GST exemption on Covid vaccines, Remdesivir injections, oxygen concentrators, ventilators, drugs, oxymeters, etc.

However, the Centre is not too keen, as exempting GST or tinkering with rates on these products may disturb other supply chains. “Exempting vaccines from GST will help no one. More than half of the vaccines are being procured by the Centre and states, and states get 70 per cent of the GST (including the 42 per cent devolution). If states want to discuss that in the Council, let there be a collective decision on GST rates on key Covid-19 related supplies,” said a senior government official.

Punjab Finance Minister Manpreet Singh Badal is also expected to raise the issue of appointing a vice-chairman of the Council from among the states under Article 279A (3) and setting up a Dispute Settlement Mechanism under Article 279A (11) of the Constitution. He is also expected to pitch for relief for sectors such as micro, small, and medium enterprises, aviation, hotels, restaurants, entertainment, commercial reality, and retail due to the pandemic. In a letter to Sitharaman, Badal had raised the issue of harassment of taxpayers, provisional attachment of productive assets, and freezing of bank accounts.

Niraj Bagri, partner, Dhruva Advisors LLP, said: “There has been a demand from several quarters that complete exemption should be given on procurement of Covid-19 relief material irrespective of whether it is procured for personal use or through the commercial channels… Recently, a writ petition had been filed before the Delhi HC seeking exemption for such goods when imported for personal consumption.”

Bagri added that while a complete exemption may not be the optimal solution for domestic sourced goods since the input tax GST becomes a cost, alternative solutions like providing for a reduced rate, treating such supplies as deemed exports have been recommended to ensure that GST does not become an additional cost.