The Center came under increased pressure on Wednesday to provide some relief to state governments staring at a revenue shock, with many BJP-ruled states also joining the chorus for expanding the GST compensation mechanism. A five-year constitutionally guaranteed fee expires today.
“Most of the state finance ministers who spoke on the matter requested an extension of the guaranteed compensation mechanism for a few years,” Finance Minister Nirmala Sitharaman said on Wednesday, but declined any commitment on the matter.
“Broadly speaking, statements have been made that, if not for five years, the compensation should continue for several years. I heard them,” Sitharaman said after the GST council meeting here.
Meanwhile, the Council approved the Interim Report of the Group of Ministers (GOMs) on tariff rationalization and also approved the groups’ recommendations on system reforms and e-waybills on intra-state gold transportation.
The record board government has been given another three months to issue its final report. Of the 16-17 states that talked about compensation, 12-13 sought to expand the mechanism, while 3-4 states talked about standing on their own two feet by increasing revenue, Sitharaman added.
The GST Compensation to States Act provides for the release of compensation at 14% year-over-year growth on 2015-16 income from taxes included in GST for the first five years of the tax, which ends on Thursday.
The average revenue shortfall across India from the protected level fell to about 27% in FY22, from about 38% in FY21, according to official sources. It may fall further in FY23, but there would still be a deficit of around Rs 1 trillion.
While the Center has made no commitment, it could in due course explore how to provide some assistance to states facing high revenue shortfalls, sources said. The Center has already announced that the levy and collection of the ‘compensation levy’ will continue until March 31, 2026. The extension was necessary due to the need to repay and repay the Rs 2.7 trillion loans drawn in FY21 and FY22. deficiency in compensation cess kitty.
GST rate increases for many items will be effective July 18. This includes a 12% tax on hotel rooms costing less than Rs 1,000 per day and a 5% tax without ITC for ‘unbranded’ prepackaged and labeled foods.
“You would be aware that GST’s revenue-neutral rate has been breached to the system’s detriment according to the RBI study. Was agreed to be 15.5%, it is now 11.6% or 11, 8% That requires a correction,” said Sitharaman.
“So, tariff rationalization, if it leads to an increase, will also offset the kind of inefficiency that has now arisen. These are waiting for correction,” said the minister.
Thiaga Rajan, finance minister of Tamil Nadu, said: “The consequences of inflation, the crackdown on the loans and expenditure of states by the Union government, which has to do with conscience, is to extend the compensation. “
“As a new state, we have limited sources of income. We in the GST Council will demand an extension of the compensation scheme or otherwise compensate for the loss of income. If it is not renewed, we will have an annual loss of about Rs 5,000 crore,” said BJP-ruled Finance Minister Prem Chand Aggarwal of Uttarakhand.
