Explained: As states push for extending compensation, what to expect on Day 2 of GST Council meeting

The Goods and Services Tax (GST) Council is meeting on Wednesday (June 29) for the second day of its 47th meeting for discussions on the contentious issue of extending the compensation mechanism for states beyond the five-year period ending this month.

While there was general consensus on the first day (June 28) among countries price rationingwhich includes correcting inverted fee structures and expanding the tax base, is set for a second day to see states raise demands for an extension of the compensation system and a flat rate 28 percent for casinos, online games and horse racing.

Why are countries asking for compensation extensions?

States/US such as Tamil Nadu, Kerala, Uttarakhand, Chhattisgarh and Delhi have called for the extension of the compensation system. Some opposition-ruled countries have also proposed amending the revenue-sharing formula under the indirect tax system.

“Consequences of inflation, suppression of state borrowing and state spending by the union, the thing to do in conscience is to extend compensation. I have said it before 3-4 times, I will say it again, the consequences for states if compensation is not extended will be very negative, very destructive In some cases to the point where I don’t think the union government wants it on, Tamil Nadu Finance Minister Panivel Thiagarajan told reporters before the meeting on Wednesday.

If they (the center) had a conscience, or at least if they were in politics, the election is coming, I suppose they wouldn’t want these negative results. The second thing is that if it is a really federal structure, then it should be the GST Council that gives the opinion rather than the union government alone.”

Uttarakhand Finance Minister Prem Chand Agarwal said the state would demand an extension of the compensation.

Being a new country, we have limited sources of income. We will ask the GST Board to extend the compensation scheme or otherwise compensate for lost revenue. “We will have an annual loss of around Rs 5,000 crore,” he said.

Kerala Finance Minister K N Balagopal said: “We look forward to requesting a five-year extension of the compensation mechanism beyond June. Discussion will occur.”

Chhattisgarh Finance Minister TS Singh Deo, in a letter to Federal Finance Minister Nirmala Sitharaman, said that if preventive revenue provision is not continued, the 50:50 formula for Central Goods and Services Tax (CGST) and Government Goods and Services Tax (SGST) should be amended, using states quota. at 70-80 percent and CGST at 20-30 percent.

“We are making the proposal in the GST Board to continue providing Protected Revenue 14 percent. If the provision of Protective Revenue does not continue, the 50 percent formula for CGST and SGST should be changed to SGST 80-70 percent and CGST 20-30 percent,” Deo The infection, who did not attend the meeting due to Covid-19, said.

High GST rate

Why are revenue growth numbers a cause for concern?

According to revenue growth data collected for the board meeting, the average all-India shortfall between protected revenue and total post-adjusted SGST revenue was 27.2 per cent in 2021-22 versus 37.9 per cent in 2020-2021.

From 2021 to 2222, only five of the 31 states/UTs – Arunachal Pradesh, Manipur, Mizoram, Nagaland and Sikkim – recorded revenue growth above the GST protected revenue rate for states.

Puducherry, Punjab, Uttarakhand, Himachal Pradesh and Chhattisgarh recorded the highest revenue gap between protected revenue and total GST revenue after settlement in 2021-22.

Protected revenue for states has grown at a slower rate than guaranteed compound growth of 14 percent in recent years, and Covid-19 has widened the gap between protected revenue and actual revenue receipts including reducing income tax collection.

In order to bridge the resource gap in the states due to the short release of compensation, the center borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 crore in 2021-22 as back-to-back loans to meet part of the shortfall in tax collection.

Under the GST, as per the Goods and Services Tax (State Compensation) Act 2017, it was guaranteed that states would be compensated at a compound rate of 14 percent from the 2015-2016 base year for losses arising from the application of the five-year tax system to its introduction.

The compensation system will expire in June.

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