States demand Vice-Chairman post in GST Council, won’t budge on compensation

Categories: GST Recent News, News

A Meeting of the Goods and Services Tax (GST) Council later this month is set to be a stormy affair with states set to air concerns of inadequate representation and an overall review of the indirect tax regime besides sticking to their demand for 14 percent compensation. States are guaranteed compensation for any revenue shortfall from the base year of 2015-16 at an annualised growth rate of 14 percent.

Opposition-ruled states such as Punjab, Kerala and Chhattisgarh are likely to insist that the Council immediately fill the post of Vice-Chairman by allotting it to a finance minister from a non-BJP ruled state. The post has remained vacant since the GST was rolled out three years ago in July 2017. The Council is chaired by Union Finance Minister Nirmala Sitharaman.

Punjab Finance Minister Manpreet Singh Badal said designating a state FM to the Vice-Chairman’s post was essential to bring states on an even keel with the Centre. “Many issues need to be looked into under GST. The post of Vice-Chairman in the GST Council also needs to be filled since otherwise there is no adequate representation of states’ agenda in the secretariat. Right now, it’s mostly run by the Government of India. It should have been operationalised three years back,” Punjab’s Finance Minister Manpreet Singh Badal told The Indian Express.

Some other state FMs, including Kerala Finance Minister Thomas Isaac, said he will support Badal’s demand. “It was raised earlier in the Council but didn’t come through. Badal has raised it, we will support him. It’s a very important vacancy and that must be filled by a non-BJP person, in particular, don’t know who, but rightfully, so that a permanent seat can be rotated,” he said.

Chhattisgarh Health Minister TS Singh Deo, who represents the state in the Council, said although the Vice-Chairman doesn’t have additional powers as such, the move would be welcome “as a federal gesture and as a measure of inclusiveness”. “States feel their views are not getting adequate representation and the tendency to take things into a Central perspective; it is objectionable also because it impinges on the federal structure. So, any time is the right time,” he said.

In the previous Council meeting, it was also decided that the Council would be convened specifically to discuss the issue of compensation. There are differing views among states on the Council itself resorting to market borrowings to raise money for revenue compensation. While Kerala backs such a move and Bihar opposes it, all states are unanimous on sticking to the 14 percent assured rate for compensation. The other option to hike GST rates is also gaining ground among states though they acknowledge it cannot be done at present given the economic slowdown.

Pushing the case for the Council to undertake market borrowing, Isaac said no state, including BJP-ruled states, would be willing to accept a lower than 14 percent rate for compensating states and there can be no compromise on that front. “You can increase the rates, but it’s not feasible now. The Centre can borrow and give to states, but the central government may not want to increase its fiscal deficit. The only option is to empower the Council to borrow,” he said.

Badal also said the GST rate structure requires an overall review. “The first thing to reform is to acknowledge the problem… If we admit there is a problem if it is very difficult to comply with, how is the rate structure, there is the multiplicity of rates, so all those things need to be seen holistically,” he said and suggested that if needed, the Council must hire outside experts to study and review the GST structure.

Deo, on his part, said, more than tinkering of rates, the pilferage leading to revenue loss needs to be plugged. “Tinkering with the rates is not the answer, the answer is to ensure tax compliance and plug all leakages. And then later on you can reduce rates,” he said.

Bihar Deputy Chief Minister and Finance Minister Sushil Kumar Modi, however, said revenue shortfall and reforms should be of greater concern. “It (designating a Vice-Chairman for the GST Council) is just a minor issue, whether it’s filled or not. The focus should be on reforms,” he said.

As per estimates shared by Modi, if revenue collections in 2020-21 are projected to be even 65 percent of the revenues collected in 2019-20, there would be a revenue gap of Rs 2,67,000 crore for states. “The total projected revenue for 2020-21 for states is Rs 6,20,000 crore as against actual accrual of Rs 5,44,000 crore in 2019-20. For cess collections, if they achieve 65 percent of last year’s levels, there would be an unfilled gap of Rs 2,05,000 crore from the amount required for compensating states,” he said.

As an option, even if there is a 1 percent increase in the average overall GST, it will yield about Rs 50,000 crore and there will still be a big gap, Modi said. Even if a 5 percent cess is levied on high-end luxury goods, which accounts for about 10 percent of the overall GST base, it would only yield about Rs 22,000-25,000 crore per annum. “Then also there will be a big gap of Rs 2,00,000 crore,” he said.

The Bihar FM, however, said borrowing from the market won’t be feasible and the only option could be to look at rate restructuring after some months. “If the Government of India will borrow and give as a loan, this is for a longer duration and the revenue gap will continue to be there. Prior to the pandemic also the gap was there, so how long can this go, it can continue for years. Then who is going to repay that loan. And if you say that you will pay interest through future revenue, then also there will be a shortfall in revenues for states in the future, so what will states get. It is wishful thinking. I personally don’t feel it is a practical idea,” he said.

“Right now, there is pandemic, so much cannot be done. Increasing tax rates can be thought about but only after 4-6 months, not now, and as per consensus in the GST Council,” Modi said.

Read More at: