Opposition-Ruled States Demand Continuation Of GST Compensation

States ruled by Opposition parties have demanded that either the revenue sharing formula under the GST regime should be changed or the compensation period should be extended by five years, amid concerns over revenue losses.

The Goods and Services Tax (GST) was introduced on July 1, 2017, and states were assured of compensation for the revenue loss till June 2022, arising on account of the GST rollout.

As the GST Council commenced here on Tuesday, the states have also cited a recent Supreme Court ruling that decisions made by the Council are not binding and states need not stick to them.

The ruling by the court has been seen by some as states having powers to determine taxation.

Chhattisgarh Finance Minister TS Singh Deo said the present formula for equally splitting revenues from the GST between the Centre and states should be changed, with a larger share of 70-80 per cent being given to states.

Kerala Finance Minister KN Balagopal said the GST compensation mechanism for states should be extended to make good the revenue loss.

"Almost all states are asking for an extension of the compensation period," Balagopal said. 

In a letter to Union Finance Minister Nirmala Sitharaman, who is chairing the GST Council meeting here, Deo said his state has suffered a huge revenue loss under the GST regime, mainly because mining and manufacturing states have suffered the most under GST, which is a consumption-based tax.

"We are presenting the proposal in the GST Council to continue with the 14 per cent protected revenue provision. If the protective revenue provision is not continued then the 50 per cent formula for CGST and SGST should be changed to SGST 80 -70 per cent and CGST 20-30 per cent," said Deo, who is unable to attend the meeting due to COVID-19 infection.

Otherwise, the present compensation mechanism, he said, should continue for another five years.

Currently, revenue collected from the GST is shared equally between the Centre and states. The collection from cess levied on luxury, demerit and sin goods is used entirely to compensate the states for revenue loss due to GST implementation.

The two-day GST Council meeting, which is currently underway in Chandigarh, is slated to discuss the compensation mechanism after the five-year period, which was decided at the time of the GST rollout.

Though states' protected revenue has been growing at 14 per cent compounded growth, the cess collection did not increase at the same proportion, and COVID-19 further increased the gap between protected revenue and the actual revenue receipt, including a reduction in cess collection.

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

As per data on revenue growth collated for the Council meeting, only five out of 31 states/UTs Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim registered a revenue growth higher than the protected revenue rate for states under the GST in the financial year 2021-22.

Puducherry, Punjab, Uttarakhand and Himachal Pradesh have recorded the highest revenue gap between the protected revenue and post-settlement gross state GST revenue in 2021-22.

As per a Reserve Bank study, the weighted average tax rate under the GST has declined from 14.4 per cent at the time of its launch to 11.6 per cent in September 2019. 

In the letter to Sitharaman, Deo said Chhattisgarh has suffered a revenue loss of Rs 4,127 crore in the last fiscal, Rs 3,620 crore in 2020-21, Rs 3,176 crore in 2019-20 and Rs 2,786 crore in 2018-19.

The most pertinent issue being brought to her notice is the ending of the provision of 14 per cent protected revenue due on June 30. Requested an extension of five years on this to protect the states from severe revenue loss and let them function as an effective federal unit of India, Deo tweeted.

Recalling the recent Supreme Court judgement regarding the power of the GST Council, Deo said: Unless we in the GST Council as its members unilaterally ensure the financial stability through rational revenue realisation for each and every State and Union Territory in India then the very concept for which the GST Council was put in place may appear to be untenable.

Separately, Amit Mitra, principal chief advisor to West Bengal Chief Minister Mamata Banerjee, said in light of the recent Supreme Court judgement all decisions of the Council should be taken by consensus. 

"Post decision of the Honourable apex court, it has become imperative for the GST council to take every decision by consensus and to leave aside any shade of majoritarianism not only for the future credibility of the GST Council but also the uphold the rich tradition of this august body," wrote Mitra, former WB finance minister.

The Supreme Court, in the Mohit Minerals Ocean Freight case, had ruled that the recommendations of the GST Council are not binding and only have persuasive value. It held that Parliament and state legislatures can equally legislate on GST.