Crucial 2-Day GST Council Meeting On Compensation Period Extension For States, Rate Rationalization Begins 

Finance Minister Nirmala Sitharaman on Tuesday chaired the two-day long 47th Goods and Services Tax (GST) Council meeting in Chandigarh. This meeting assumes significance as states have been demanding an extension of the 5-year compensation payout period that comes to an end on July 1 2022.

While rate rationalization was earlier being expected to be a key agenda for this month’s meeting, persisting high levels of inflation has made it difficult for the government to take up rate rejig to boost revenue, but other key issues like creating a mechanism for compensating states for revenue loss, tax rate tweaks in some items and relaxed registration norms for small online suppliers are expected to be taken up for discussion.

Opposition-ruled states are expected to raise the issue of compensation regime extension that is presently in place to bridge revenue loss to states on account of GST implementation. The economic slowdown brought the centre-state relation under stress, especially as the five-year limit to give 14 per cent compensation on revenue to states under the GST regime would end this year. From 2019 onwards, a majority of the non-BJP ruled states, like Rajasthan, Tamil Nadu, Chhattisgarh, Kerala, West Bengal, Delhi and Punjab, have been pushing for an extension of the GST compensation period by five years.

“GST has been a good idea but badly implemented. Micro-level management in implementation did not happen. Because of that, states are in a very bad position. Extension of compensation scheme should happen,” Delhi finance minister Manish Sisodia said at the meeting venue.

Sisodia added that Centre was not being asked to pay from its resources and that compensation funds were supposed to be paid from levy of cess. “Till effective implementation of GST happens, the way it was envisaged, the compensation regime should be continued. States surrendered most of their taxation rights, VAT was one of the biggest components for them. 14 per cent growth was promised, which is not being achieved and it’s coming to an end. This is not done,” he added.

The Centre, last week, notified extension of the compensation cess, levied on luxury and demerit goods, till March 2026 to repay borrowing that were done in 2020-21 and 2021-22 to compensate states for GST revenue loss. 

GST was introduced from July 1, 2017, and states were assured of compensation for the revenue loss, till June 2022, arising on account of GST roll out. Though states' protected revenue has been growing at 14 per cent compounded growth, the cess collection did not increase in the same proportion, COVID-19 further increased the gap between protected revenue and the actual revenue receipt including reduction in cess collection.

The Council is also expected to take up for discussion a report by the panel of state ministers on making e-way bill mandatory for intra-state movement of gold and precious stones worth Rs 2 lakh and above and e-invoicing mandatory for all taxpayers supplying gold and precious stones and having annual aggregate turnover above Rs 20 crore. 

Besides, an interim report of a group of ministers on rate rationalisation, headed by Karnataka Chief Minister Basavaraj Bommai, which has suggested correcting the inverted duty structure and removing some items from exempted list, would also be taken up for consideration. 

Another report by the committee of state and central officers, commonly referred to as the Fitment Committee, which suggested tweaking rates in a handful of items and issuing clarification in case of majority of items is also likely to be taken up for deliberations in this meeting.

As part of other measures to boost revenue, the Council would be taking up correction of inverted duty structure for items such as power-driven pumps, LED lamps, finished leather composite works, printing/drawing ink, knives, solar water heater, spoons as well as withdrawal of exemption on pre-packaged and labelled food items such as wheat flour, puffed rice, curd/lassi/buttermilk, paneer and chilled meat/fish.