GST compensation in limbo: Group of ministers on slabs rejig gets 3 more months

The Centre on Wednesday came under greater pressure to provide some relief to the state governments that are staring at a revenue shock, with many BJP-ruled states also joining the chorus for extension of the GST compensation mechanism. A five-year, constitutionally guaranteed compensation ends today.

“Most of the state finance ministers who spoke on the issue sought extension of the guaranteed compensation mechanism for a few years,” finance minister Nirmala Sitharaman said on Wednesday, but refrained from making any commitment on the matter.

“Broadly, statements were made that if not for five years, for some years the compensation should continue. I have heard them,” Sitharaman said after the GST Council meeting here.

Meanwhile, the Council approved the interim report of the group of ministers (GoMs) on rate rationalisation and also endorsed the recommendations of the groups on system reforms and e-way bills on intra-state gold movement.

The GoM on slabs rejig has been given three more months to give its final report. Out of 16-17 states which spoke on compensation, 12-13 sought extension of the mechanism, while 3-4 states talked about standing on their own by augmenting revenues, Sitharaman added.

The GST Compensation to States Act provides for the release of compensation against 14% year-on-year growth over revenues in 2015-16 from taxes subsumed in GST for the first five years of the tax, which will end on Thursday.

All-India average revenue shortfall from the protected level declined to about 27% in FY22 from about 38% in FY21, according to official sources. It may further decline in FY23, but there would still be a shortfall of around Rs 1 trillion.

While the Centre has made no commitment, it may examine the matter in due course how some succour could be provided to states facing high revenue deficits, sources said. The Centre has already notified that levy and collection of ‘compensation cess’ will continue till March 31, 2026. The extension was necessitated because of the need to service and repay the loans worth Rs 2.7 trillion taken in FY21 and FY22 to compensate states for the shortfall in the compensation cess kitty.

GST rate increases on a host of items will be effective from July 18. This includes a 12% tax on hotel rooms costing below Rs 1,000 per day and a 5% tax sans ITC for ‘unbranded’ prepackaged and labelled food items.

“You would be cognizant of the fact that the revenue-neutral rate of GST as per the RBI study has been breached to the disadvantage of the system. While it was agreed to be 15.5%, it has come to 11.6% or 11.8%. That requires a correction,” Sitharaman said.

“So, rate rationalistion, if it results in an increase, will also make up for the kind of inefficiency which has appeared now. These are waiting for correction,” the minister said.

Tamil Nadu finance minister P Thiaga Rajan said: “The consequences of inflation, the cracking down on states’ borrowing and spending by the Union government, the thing to do with conscience is to extend compensation.”

“Being a new state, we have limited sources of revenue. We will demand in the GST Council for an extension of the compensation scheme or in some other way compensate for the revenue loss. If not extended, we will have an annual loss of about Rs 5,000 crore,” BJP-ruled Uttarakhand finance minister Prem Chand Aggarwal said.