States reject Finance Commission’s view on slashing of GST compensation

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State governments have turned a blind eye to a suggestion from a constitutional body on Centre-state finances that states’ compensation for revenue shortfall from Goods and Services Tax (GST) could be lowered.

The suggestion from the Fifteenth Finance Commission (FFC) that central government compensating states for revenue loss to ensure they have a 14% annual increase in their GST revenue was not sustainable and hence the basis for compensation could be reworked did not get support from states at the GST Council meeting here on Friday, two persons privy to the discussions in the Council said.

“States were of the view that there should be stability in GST structure now. I also subscribe to that view,” Himanta Biswa Sarma, Assam’s Finance Minister told reporters.

Another state finance minister who spoke on condition of anonymity said that states were of the view that there is no fiscal space for GST rate cuts and that any further change should only be discussed after the FFC gives it’s recommendations.

Fifteenth Finance Commission (FFC) is set to submit its recommendations on sharing Union government’s tax revenue with states for the five years starting April 2020. The Commission, which made a presentation to state Finance ministers at the GST Council was of the view that states’ tax base has come down because of successive rounds of GST rate cuts.

Officials of states and the union government were of the view that GST rates should not be seen as an instrument to stimulate economic growth given the sluggish growth in revenue collection.

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