Compensation To States To Dominate GST Council Discussions On June 12

The issue of compensation to states is expected to dominate discussions at the GST Council’s next meeting on June 12 as the body meets for the first time since the nationwide lockdown, imposed after the Covid-19 outbreak, was lifted.

States will raise the issue of compensation even as the central government released Rs 36,400 crore to them last week for December-February period, according to two officials with direct knowledge of the matter. The central government compensates states bi-monthly after they lost powers to levy indirect taxes such as value added tax with the rollout of goods and services tax. The compensation is guaranteed for five years, and is calculated at a growth rate of 14% annually keeping 2015-16 as the base year.

The compensation released last week is for December, January and partially for February, the officials cited earlier said.

Since August 2019, collections from compensation cess—that’s levied on sin or demerit goods—started falling short compared to the compensation payout, the central government had started delaying payments and released the amount to states in tranches.

With GST collections sharply reducing in March, states are expected to raise concerns over revenue shortages as they’re at the forefront of fighting the pandemic, the officials cited earlier said. In March, the central government’s GST collection dropped 87% year-on-year, however the due date for payment of tax is June-end.

The dismal collections for the next two months—when all but essential businesses remained shut, decimating consumption and economic activity—would mean a significant increase in compensation payout for states even when tax collections are expected to be at their lowest. However, shortfall in GST collections after the lockdown will not be that drastic as anticipated, the officials cited earlier said, adding collections have already started picking up.

The GST Council must now arrive at a solution to pay timely compensation to states, even as the central government’s hands have been tied due to low tax collections, the two officials said. A middle ground will have to be reached by them and the states, they said, and that would either involve agreeing to raise money from the markets with a guarantee from the central government or by extending compensation levy beyond five years and continuing to compensate states with the collections.

Rate Rationalisation Unlikely

Rate rationalisation is unlikely as reducing rates isn’t expected to increase demand, and there isn’t any study that says so, the people cited earlier said. Consumers are curbing expenditure and saving, the people said, and slashing rates isn’t the solution as GST on basic necessities is already nil.

The GST Council will also discuss waiving late filing fee for returns for July 2017 to January 2020, and this is likely to be approved, the officials said.

The government has already waived late fee for filing GSTR-3B returns for February 2020-May 2020.