GST Council meeting to discuss issue of compensation to states, revenue generation; rate tweaks unlikely

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The GST Council, scheduled to meet on June 12, is set to discuss the issue of compensation to states and revenue augmentation methods. “There is no question of considering increasing taxes. It will be counter-productive now. Compensation, how to generate revenues via other means would be taken up for discussion,” a government official said.

The Finance Ministry is not in favour of increasing GST rates on non-essential items, despite depressed revenue collections due to the nationwide lockdown to contain the spread of COVID-19. If GST rates are increased on non-essential items, it will further bring down their demand and impede the overall economic recovery. Post-lockdown, the demand has to be induced and economic activity has to improve on all fronts, not just on essential items side. 

The 40th meeting of the GST Council, headed by Finance Minister Nirmala Sitharaman, will be held through video conference. The 39th meeting of the GST Council held in March discussed the impact of coronavirus on the economy. States are expected to take up the falling revenues as they are battling the economic threats of COVID-19. GST collections for March reduced sharply, as the central government’s GST collection dropped 87 percent year-on-year. The due date for payment of tax in June-end.

Faced with the dismal collection and extended deadline for filing returns, the government refrained from releasing the monthly GST revenue collection figures for April and May. “There will be discussions on ways to garner funds to compensate states for the revenue loss due to GST implementation,” the official said.

In the previous council meeting, Sitharaman had said the Centre will look into the legality of GST Council borrowing from the market to meet the compensation requirements. With states raising the issue of shortfall in compensation kitty, there were discussions on resorting to market borrowing to meet the revenue guarantee to states.

Last week, the central government had released pending compensation payment to states amounting to Rs 36,400 crore for November-February for 2019-20. Under GST law, states were guaranteed to be paid for any loss of revenue in the first five years of the GST implementation from July 1, 2017.

The shortfall is calculated assuming a 14 percent annual growth in GST collections by states over the base year of 2015-16. The total GST collections in FY20 has grown by 3.8 percent to Rs 12.2 lakh crore. States are promised compensation for any revenue shortfall till 2022, in case they go below the 14 percent annual growth since the GST rollout in 2017.

Under the GST structure, taxes are levied under 5, 12, 18, and 28 percent slabs. On top of the highest tax slab, a cess is levied on luxury, sin, and demerit goods and the proceeds from the same are used to compensate states for any revenue loss. The Council would also discuss the waiver of late fees for non-filing of GST returns for the period August 2017 to January 2020.

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