With the finance ministry officials kicking-off their internal discussions regarding the fitment of goods and services in the multi-tier tax slabs under the proposed Goods and Services Tax (GST), the decision to assume a 14 per cent revenue growth for states during the transition period is turning out to be one of the sticky points. While the government aims to classify most items, especially mass consumption items such as consumer durables, under the modal 18 per cent tax slab, the emerging view is that assumption of 14 per cent revenue growth for states, instead of the earlier proposed fixed rate of 12 per cent, may create the need for most items being pushed into the higher tax slab of 28 per cent.
Officials aware of the discussions in the GST Council, which had fixed the revenue growth at 14 per cent in October last year, say that the demand for projected revenue growth for states higher than 12 per cent was conceded by the Centre on the insistence of the states.
“The 14 per cent revenue growth rate was not based on any formula per se, but was fixed as states insisted upon it. Since Centre will need to raise revenue for compensation to states, there is a higher risk of more number of items getting classified in higher tax rate slab,” one of the officials said.
As per the calculations presented in the GST Council meetings last year, the central revenue to be protected for 2015-16 was estimated to be Rs 4.42 lakh crore, while for states, it was estimated to be Rs 4.40 lakh crore. Among the 29 states and 2 Union territories of Delhi and Puducherry, the modal revenue growth rate was 9.3 per cent for 2015-16 and 12 states/UTs had indirect tax revenue growth of over 14 per cent. The state revenue numbers, however, may include taxes on petroleum and alcohol, which are exempt under GST as of now.
With about 17 states having revenue growth below 14 per cent in 2015-16, Centre is likely to feel the burden of a higher compensation payout post-GST rollout.
The GST (Compensation to the States for Loss of Revenue) Act has projected the revenue growth for states during the five-year transition period to be 14 per cent. The financial year of 2015-16 has been fixed as the base year for calculation of compensation amount, with the base year tax revenue including states’ tax revenues from state VAT, central sales tax, entry tax, octroi, local body tax, taxes on luxuries, taxes on advertisements. However, any revenue among these taxes related to supply of alcohol for human consumption and certain petroleum products will be excluded from the base year revenue.
Last year, the GST Council had discussed several options for calculation of the projected growth rate of compensation, including considering average revenue growth achieved in three years preceding the 2015-16 financial year or of five years preceding the base year. Other options such as average revenue growth achieved in three of the five years preceding 2015-16 by excluding outliers or a rate equivalent to the nominal GDP growth rate of the country were also a part of the discussions between the states and the Centre in the meetings of the GST Council.
States such as Tamil Nadu had proposed a minimum growth rate of revenue of 12 per cent, while other states such as Odisha, Gujarat and Meghalaya had supported the option of taking the average growth rate of best three years of the five years preceding 2015-16. A growth rate equivalent to nominal GDP growth rate of the country had not found favour with the Centre as it was felt that since revenue earned depends on the growth of the economy, in case, sufficient revenues are not generated due to an economic slowdown, it would not be possible to pay compensation at higher growth rates.
In fact, in the third meeting of the GST Council in October last year, Finance Minister Arun Jaitley had proposed a revenue growth rate of 10.6 per cent as being closer to reality for that was the average all-India growth rate during the three years preceding 2015-16.
The Centre was of the view that since the average growth rate of the five years preceding the base year was 14.2 per cent, while the projected nominal GDP growth rate for next five years was 12-13 per cent, the projected revenue growth after removing two outliers would have worked out to be 13 per cent–a rate which would be burdensome for Centre, but would still be bearable. However, GST Council meeting’s records show that the suggestion of 14 per cent revenue growth was accepted “in the spirit of compromise” to reach a unanimous agreement on the proposal.
The issue of fitment of goods and services in the tax slabs of 5, 12, 18 and 28 per cent along with additional cess on sin and luxury goods will come up for discussion in the next meeting of the GST Council, which is scheduled to be held on May 18-19. The cess collections will flow into a compensation fund, which will be used for compensating states for revenue losses after the implementation of the indirect tax regime, which the government aims to roll out from July 1 this year.