Uttar Pradesh wants the Centre to continue the compensation scheme under the Goods and Services Tax (GST) for the next five years. And when the time comes, the central government should withdraw the compensation in phases and not at one go, the state government feels. The current five-year scheme ends in August 2022. Having put the demand to the 15th Central Finance Commission (CFC) that visited the state last week, the state government is planning to write a formal letter to the Centre in this regard. Additional chief secretary, commercial tax, Alok Sinha had made a detailed presentation before the CFC headed by a former bureaucrat and Rajya Sabha member NK Singh.
“Our main contention is that since the GST is still to stabilize, with the GST Council making amendments to the tax slabs and rates every now then, the compensation for any possible revenue fall due to GST must continue for the next five years till 2025,” commercial department sources said. “We have already apprised the 15th Finance Commission of our concern and may take up the issue with the GST Council also,” they added. Prior to the national rollout of the GST in August 2017, the Central government provided for guaranteed compensation for reported revenue deficit on account of implementation of the new tax regime.
As per provisions in Section 7 of the GST (Compensation to States) Act, 2017, loss of revenue to the states on account of implementation of GST is payable during the transition period and compensation payable to a state is provisionally calculated and released at the end of every two months during the transition period of five years. The states are eligible for compensation if their annual revenue growth remains below 14% and they are compensated to the extent of the deficit. The five-year compensation system will come to an end in August 2022.
The Central Finance Commission that is visiting all the states before it fixes their share in the Central government’s funds will be giving its recommendation shortly. Once accepted by the Centre, the recommendations will remain in force for five years until the new Finance Commission is set up. In its presentation, the state government told Commission that states were assured compensation at the rate of 14% for five years but the impact of GST rate rationalisation introduced during the last two years was yet to be stabilised. It further pointed out that the protocol of data sharing among all the states and the Centre to check tax evasion and bogus ITC (input tax credit) was also not finalized. It said if compensation to states was discontinued after August 2022, the move will adversely affect the financial position of the states. “Therefore, compensation to the states for a possible revenue loss should be extended for the next five years,” UP said, while putting forth its demand to the Finance Commission.