Indian Tax Solution
As a comprehensive GST rates overhaul may be postponed for a later date - finance minister Nirmala Sitharaman recently said she preferred the system to stabilise before another major rates rejig.
The Goods and services tax (GST) Council, at its next meeting likely by the end of this month, will devise a mechanism on how additional funds would be found to bridge the states' GST 'revenue shortfall', given that the designated corpus has fallen short of the requirement, according to official sources.
The obvious options are to restructure the GST slabs and raise the aggregate rate to the revenue-neutral level envisaged before GST's launch or hike the cesses, through which the compensation funds for states are mobilised or introduce new such imposts.
Speaking at the Indian Express group's Idea Exchange programme recently, finance secretary Ajay Bhushan Pandey said the relevant law was clear that the Centre could make payments only from the compensation proceeds generated out of cesses levied on items under GST, for bridging the states' revenue shortfall.
"Whatever money comes in that (compensation) fund, only that money can be paid (to states). Now, if there is a shortfall (against states' guaranteed revenue growth of 14%) which is more than what could be overcome by compensation fund, the GST Council will take a decision on what measures can be taken to either increase the cess amount or consider the rates or take any other measure".
The Centre has recently said it will use about Rs 28,000 crore of the Rs 47,271 crore absorbed by the Consolidated Fund of India in FY18-FY19 period as 'surplus' revenue from the GST compensation cess to reduce the state governments' GST revenue shortfall in FY20.
Even after this, the states' GST revenue (SGST) in FY20 will be some Rs 28,000 crore short of the level they would have achieved under the 14% guaranteed annual growth formula. Some Rs 20,000 crore of the surplus that merged with the CFI was used to bridge states' shortfall in the final months of FY19.
While states wanted the Centre to meet its 'constitutional obligation,' the Centre remained ambivalent on how the issue would be tackled. Clarity on the Centre's stand emerged when, in her Budget speech, finance minister Nirmala Sitharaman said: "It is decided to transfer to the GST compensation fund balances due out of collection of the years (2017-18 and 2018-19), in two instalments. Hereinafter, transfers to the fund would be limited only to collection by way of GST compensation cess."
Some states are threatening to move the Supreme Court against the Centre's decision. Kerala finance minister Thomas Isaac said the state government would approach the apex court under Article 131 to secure the pending GST compensation from the Centre. West Bengal finance minister Amit Mitra had said it was for the Central government to devise a mechanism for payment of compensation to states under GST, if the fund set up for the purpose ran dry, given the silence of the relevant law on an alternative mechanism.
The guaranteed level of SGST revenue in the current fiscal is Rs 6.70 lakh crore. The Centre's budgeted GST revenue (CGST, compensation cess), according to the revised estimate, is Rs 6.12 lakh crore, against the original estimate (BE) of Rs 6.63 lakh crore. The collections fell woefully short of estimates in earlier months, but have picked up in December-February.
In aggregate, GST collections are still way below the targets set by the authorities, but their efforts to improve compliance, check excessive use of input tax credits and frustrate frauds like fake invoicing are paying off, albeit gradually.
Since the Centre cut its own budget estimate for GST by over 8%, it would likely meet the revised estimate, even with the current pace of collections; but in order to be able to meet the gross collections target, which includes fully compensating the states for any revenue shortfall from the assured annual growth level of 14%, the March mop-up requires to be an impossibly high Rs 1.4 lakh crore.
Some of the suggestions presented before the Council in last meeting included rationalising GST rate structure to just two rate slabs of 10% and 20%, and a special higher rate on sin and luxury goods and imposing cess on additional items like cosmetics, gambling and recreational services. Further, a committee of officials suggested that some of the items currently exempt like health and education could be selectively taxed. Another option of revisiting rates of certain items that were brought to 18% from 28% earlier.
However, while the committee presented an analysis of different options for the Council to augment revenue collection, it said any increase in compensation cess rate or base would not yield significant revenue if collection growth remained subdued.
The Council, according to sources, could look at imposing cess on items in the 18% tax bracket if there is a consensus that these items can be classified as non-essential. Nearly half of GST revenue comes from items in the 18% slab. The cess is now there on a handful of items that aren't in the 28% tax slab while all items in the 28% slab attract cess.