Compensation cess, fuel to fire up GST Council meet
States dig in their heels as panel holds first physical meeting in 20 months
The Goods and Services Tax Council meeting on Friday is expected to see hectic discussions on two contentious issues between the Centre and the states: Extending the period of compensation cess for states and bringing petroleum products under GST.
The meeting of the Goods and Services Tax (GST) Council on Friday in Lucknow, the first physical meeting in over 20 months, is expected to see hectic discussions on two contentious issues between the Centre and the states: Extending the period of compensation cess for states and bringing petroleum products under GST. States are expected to stay firm on their demand to extend the compensation period by another five years, at the existing assumed growth rate of 14 per cent.
The Centre will give a detailed presentation, listing out the scenario post June 2022 and the options to make up for the shortfall. It is unlikely to agree on continuing with the 14 per cent growth assumption.
“The compensation cess must be extended on the same conditions. We will not agree to a lower assumed growth rate,” Kerala Finance Minister K N Balagopal told Business Standard. Chhattisgarh Health Minister T S Singh Deo, who represents the state at the Council, added that his state will have to bear a loss of close to ~3,000 crore annually if the compensation is stopped post-2022. “After June 2022, we will be at a big loss as GST is a consumption-based tax.”
He added that while consuming states such as Uttar Pradesh and Bihar were gaining from the GST regime, producing states were losing out. “The consuming states are getting a higher revenue than what they got in the VAT regime, whereas producing states have lost out badly from the GST regime,” he said, adding, “UP gets tax on what we produce, and not Chhattisgarh. We don’t get anything on the bauxite, steel, cement, iron ore, or any other commodity that is mined and produced here. Chhattisgarh’s land and water resources are used but we do not get the revenues.”
While Deo himself would not be present at the Lucknow meeting, he said they would pitch for an extended compensation for at least the producing states. “We will propose that,” he said. On whether the state will agree to an extended compensation period but at a lower assumed growth rate, Deo said, “It has to be something reasonable.” Tamil Nadu Finance Minister Palanivel Thiagarajan, too, will not attend the meeting.
Meanwhile, Delhi is also expected to strongly root for an extension of the
GST compensation period, arguing that it may incur an annual loss of close to ~8,000 crore if this is not done.
Compensation cess is levied on luxury and sin items such as aerated drinks, coal, pan masala, cigarettes and automobiles over the peak rate of 28 per cent. Under the GST law, if states’ GST revenue does not grow by at least 14 per cent over the base year of 2014-15, the Centre pays them the difference after every two months for the first five years of the GST being implemented. The five years end in June 2022.
The Centre is likely to convey that GST revenues would do better than expected this year and a compensation cess of ~1 trillion would be released to states. Besides, the back-to-back assistance of ~1.59 trillion borrowed from the market would more than cover the gap and partially compensate for last year’s arrears.
The Council may consider including
petroleum in GST with natural gas and aviation turbine fuel (ATF) to begin with. This is part of the agenda following a writ petition in the Kerala High Court, which argued that not including petrol and diesel had led to an increase in their prices, making the petitioner’s (auto-rickshaw driver’s) profession unviable.
Finance ministers of various states said detailed discussions are needed on the issue and that one meeting may not suffice. “Most states will be reluctant to give up on their right of taxation on petroleum products. Even the Centre will have much to lose with the enormous cess imposed on petrol and diesel, which it doesn’t share with the states,” said one finance minister.
With petrol prices crossing ~100 a litre in three of the four metro cities — Delhi, Mumbai and Kolkata — and at ~98.96 a litre in Chennai as on September 10, many have been demanding that fuel be included in GST, as they will get input tax credit.
Currently, crude oil, natural gas, diesel, petrol, and aviation fuel fall outside the ambit of GST and are subject to the Central excise and statespecific value added tax. However, domestic LPG and PDS kerosene attract a GST of five per cent.
Given their contribution to the states' and Centre's exchequer, bringing petroleum products in the GST fold might be easier said than done. Central taxes on various petroleum items stood at ~4.19 trillion in 202021, making for about 21 per cent of the total tax (~20.25 trillion) collected by the Union government.
The Constitution (101st Amendment) Act, 2016, however, does have a provision to bring petroleum under GST when the Council so decides.
“It is essential to start a discussion on the matter. We are in the fifth year of GST. It would be appropriate if this meeting sets the direction on including at least a few products like natural gas and ATF,” said M S Mani, partner, Deloitte India.
Pratik Jain, partner, Price Waterhouse & Co LLP, pointed out that while including petroleum products may be debated, chances of passenger fuels coming under GST appear remote.
Among other issues, the meeting, to be chaired by Union Finance Minister Nirmala Sitharaman, will decide whether the term of the national anti-profiteering authority will end on November 30, 2021 and whether the Competition Commission of India would get the mandate.
The Council is also expected to extend the existing concessional rate on Covid-19-related drugs including Amphotericin B, Tocilizumab, Remdesivir and anticoagulants like Heparin, valid till September 30, 2021, be extended till December 31, 2021. It has also recommended that GST rates be reduced from 12 per cent to 5 per cent till December 31, 2021 for seven more drugs: Itolizumab, Posaconazole, Infliximab, Bamlanivimab & Etesevimab, Casirivimab & Imdevimab, 2-Deoxyd-glucose and Favipiravir.
The Centre is likely to convey that GST revenues would do better than expected this year and a compensation cess of ~1 trillion would be released to states