States to seek extension of GST compensation period
Rajeev Jayaswal, Navneet Sharma and Umesh Raghuvanshi
NEW DELHI, CHANDIGARH AND LUCKNOW: The Goods and Services Tax (GST) Council’s meeting next week is likely to be stormy with several Opposition-ruled states—armed with their own interpretations of a recent Supreme Court ruling that recommendations of the council are not binding—may aggressively push for extending the five-year compensation period that is ending on June 30, 2022, four people aware of the matter said.
States such as West Bengal, Kerala, and Punjab, have already urged Union finance minister Nirmala Sitharaman to extend the compensation period for another three to five years because of severe devastation caused to their economies by the pandemic and supply chain disruptions due to the Ukraine war, officials belonging to the Union and state governments said, requesting anonymity.
The GST law assured states a 14% increase in their annual revenue for five years from July 1, 2017, and also guaranteed that their revenue shortfall, if any, would be made good through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, other tobacco products, aerated water, automobiles, and coal. While the legally binding five-year period of compensation will end on June 30, the compensation cess on sin goods and luxury items may continue till March 31, 2026, to retire debts raised from the market to compensate states during the pandemic period.
“While the Opposition-ruled states are vocal about continuance of compensation beyond June 30, other states are also eager for an extension,” said one of the officials mentioned above. The Aam Adami Party, which has inherited financially stressed Punjab this year has been vocal about an extension. “We are in favour of continuation of GST compensation. We will be taking up this issue [at the council meeting],” said Punjab’s finance and taxation minister Harpal Singh Cheema.
The two-day GST Council meeting is scheduled to be held on June 28 in Chandigarh.
Another state, West Bengal, has already written to Union finance minister Nirmala Sitharaman seeking a three- to fiveyear extension. “We note with dismay an ominous sign that the Centre has decided to withdraw the GST compensation to the states from July, 2022. Such a decision, if taken, is completely contrary to what was envisaged at the time of adoption of GST,” Amit Mitra, principal chief advisor to the chief minister of West Bengal said in the letter dated June 11.
To be sure, that the compensation period would end on June 30 has been known since 2017.
But even the Bjp-ruled states are also expecting some relief. “The Centre did a great job by giving us compensation for the GST shortfall. We are thankful to Prime Minister Narendra Modi and Union finance minister Nirmala Sitharaman for this. We will seek the Centre’s guidance on how to meet the shortfall once the GST compensation is stopped,” Uttar Pradesh finance minister Suresh Khanna said. Responding to a query on whether the state government would raise the issue at the GST Council meeting in Chandigarh, he said, “We will watch the interests of the state at every level.”
A second official, who asked not to be named, said some states, particularly those ruled by the Opposition, could take an aggressive position at the meeting in Chandigarh, citing the recent verdict of the apex court and try to oppose the proposed move of the council to rationalise tax rates without addressing the compensation issue.
The top court on May 19 ruled the recommendations of the GST Council are not binding on either the Centre or states. A bench, headed by justice Dhananjaya Y Chandrachud, held: “Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime, to foster cooperative federalism and harmony between the constituent units.”
According to two experts, the Supreme Court’s verdict last month in no way changed the architecture and authority of the GST Council. As the apex court stated the obvious, no amendments in the GST laws are required, they said. “The Supreme Court in the context of the issue (tax issue related to ocean freight) has observed that the recommendation of the GST Council has persuasive value for primary legislation, and its recommendations are binding in so far as subordinate legislation is concerned, such as issue of notification, framing of rules, prescribing rates and taxes, etc.” one of them said.
Experts said cess must not assume a permanent character which is contrary to the basic architecture of the GST regime. The council may devise some other mechanism to support only those states that are facing revenue shortfalls.
“The extension of the period in order to continue the revenue safeguards for states [besides already extended period to repay the loans during the pandemic period], would make it even more difficult for businesses. Since the GST legislation permits a maximum rate of 40%, although using the limit is to be eminently discouraged, as a temporary measure and for very selected sin products, a recourse to 40% without any cess may also be considered,” MS Mani, partner at Deloitte India, said.
Saurabh Agarwal, tax partner at consultancy firm EY India, said extension of the compensation period is a “contentious issue requiring amendment” in the Constitution. “If the GST compensation is not extended, few states may possibly look at levying special cesses to compensate their revenues, which would distort the entire intent of the GST legislation, which is One Nation, One Tax. We should expect simplification of tax regime in the form of rationalisation of tax rates and correcting the inverted duty structure.”