May discuss revenue position, compensation framework for revenue shortfall
The GST Council will interact with the Finance Commission during its September 20 meeting at Goa.
This interaction assumes significance as the Finance Commission is expected to submit its report by November 30. It will suggest the formulae for the distribution of taxes between the Centre and States for a five-year period starting April 1, 2020. Recommendations of the Commission are binding on the government.
One of the terms of reference of the Commission says, “While making its recommendations, the Commission shall have regard, among other considerations, to the impact of the GST, including payment of compensation for possible loss of revenues for 5 years, and abolition of a number of cesses, earmarking thereof for compensation and other structural reforms programme, on the finances of Centre and States”.
The Commission may consider proposing measurable performance-based incentives for States, at the appropriate level of government, based on States’ efforts in expanding and deepening of tax net under GST.
“Chairman of the Finance Commission NK Singh will address the Council while Secretary Arvind Mehta will also participate,” a senior government official told BusinessLine. The Commission and States are likely to deliberate on issues like current revenue position and compensation framework for revenue shortfall.
“Many States in their respective meeting with the Commission have expressed views that compensation for five years is not sufficient. In fact, they said GST needs longer time to settle, so they are seeking compensation beyond five years,” the official said.
The Goods and Services Tax (Compensation to States) Act, 2017 provides for full (100 per cent) compensation to the States for the loss of revenue arising on account of implementation of the GST Compensation will be provided to a State for a period of five years from the date on which the State brings its SGST Act into force.
For the purpose of calculating the compensation amount in any financial year, 2015-16 has been taken as base year.
The growth rate of revenue for a State during the five-year period is assumed at 14 per cent per annum. The base year tax revenue consists of the States ‘tax revenues from State Value Added Tax (VAT), Central sales tax, entry tax, octroi, local body tax, taxes on luxuries, and taxes on advertisements, etc’.
However, tax revenues from supply of alcohol for human consumption, and five specified petroleum products, will not be accounted as part of the base year revenue. Amount for compensation cess is collected through cess levied on goods and services having GST rate of 28 per cent.
According to officials, many States said that slowdown in various sectors had affected their revenue and recovery will take a longer time. Hence they are seeking a longer period of compensation.