GST Compensation Bill to detail revenue foregone by states

NEW DELHI: Government will introduce a bill in the winter session of Parliament beginning next week tabulating the revenue likely to be foregone by each state on account of subsuming of local taxes and the Centre’s contribution to make up for the loss.

The GST Compensation Bill will provide a legal backing to the Centre’s promise to compensate the states if their revenue growth rate falls below 14 per cent in the first five years of the GST roll out. The base year for calculating the revenue of a state has been decided as 2015-16.

“The compensation law would have the taxes subsumed and the revenue forgone by each state on account of GST implementation. It will give details on how the Centre plans to raise funds for compensating the revenue loss,” an official said.

A separate law will give the provisions a statutory backing and there will not be any case of any understanding error between the Centre and the states in future. The winter session of Parliament begins on November 16.

The officials of the central government will finalise the draft GST Compensation Law by November 15 and thereafter it would be circulated to the states. The GST Council in its meeting on November 24-25 will discuss the proposed law.

Goods and Services Tax (GST) will replace all indirect taxes on goods and services imposed by central and state governments.

The Centre and the states have converged to a four-tier GST tax structure of 5 per cent, 12 per cent, 18 per cent and 28 per cent and keeping out essential items out of the purview of the new taxation regime.

The Centre will, however, impose a cess on luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, over and above the the highest 28 per cent.

Under the structure, the clean energy cess and cess on luxury items and demerit goods would be utilised to create a Rs 50,000 crore fund every year which will be utilised to compensate the states for first five years of GST roll out.

The official said the bill would also specify how much revenue is being raised from which item by way of levy of cess and also the way it is reimbursed to the states, thereby leaving no room for ambiguity.

Besides, it would also specify that at the end of five years if there is a surplus in the cess pool, in what proportion it should be decided between the Centre and the states, the official added.

“New GST structure likely to be non-inflationary,” Citigroup said in a research note, adding, “it appears that most of the items in the CPI basket will be taxed at a rate which is very close to their current levels”. According to Citigroup, even if some of the ‘services’ move to 18 per cent tax bracket (from 15 per cent), it is not likely to stroke inflationary consequences if the tax pass-through is smooth.

On the other hand, given that tax rates will be mostly unchanged, the positive growth impact will be felt only through better tax efficiency, the report added.

The report noted that the non-inflationary bias drove the GST rate consensus and bodes well for the introduction of new GST rates from April 1, 2017.