The 45th GST Council meeting is scheduled to be held on September 17. Without reading too much into the rationale for selecting Lucknow as the venue, suffice it to say this will be a significant meeting. This is the first physical meeting after a long time. And the long shadow of compensation to States hangs heavily.
The Constitution (101st) Amendment Act 2016 provides for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. The deadline of June 2022 is fast approaching. The States will be anxious to get clarity if their demand for extending the compensation timeline is being considered. Given the unprecedented economic impact of the pandemic and the extensive loss of revenues, both to Centre and States, this will be a difficult call. However, the importance of taking a decision on this issue cannot be overemphasized – it would appear for many States that compensation is the glue which is holding GST together.
Closely linked with this issue is the rate at which compensation should be calculated. A compound growth rate of 14 percent from the base figure of 2015-16, has only led to fiscal lethargy on the part of the States. As the incisive analysis by Manish Gupta and Indira Rajaraman (Economic & Political Weekly, November 28 2020, Vol LV no.47) shows there was no economic justification when this rate was agreed to-there is lesser justification now.
The next issue of course is the gap and delay in giving the compensation. As per the written reply to a Lok Sabha question on July 19 2021, the MoS Finance had informed that GST compensation due for the period April 2020-March 2021 was 81,179 crore and Rs 55,345 crore, for the period April-May 2021. Compensation is due to all the States except Arunachal Pradesh, Manipur, Mizoram and Nagaland.
The amounts are particularly substantial for some states-Maharashtra is due Rs. 23,133 crore, Tamil Nadu Rs. 9729 crore, Karnataka Rs. 12,702 crore, Uttar Pradesh Rs.11157 crore, for the 2 years. The Centre would hopefully release some amounts before the Council meeting. This would help calm ruffled feathers and facilitate meaningful discussions.
The issue of bringing in some petroleum products into the GST chain needs to be brought to the table. There can never be a good time to have this discussion given the huge revenue it generates for both Centre and the States. But a beginning with at least ATF can be made-the revenue impact will be minimal and the process would have started.
A review of the reduction in rates given on various products in the light of COVID on the recommendations of the 43rd and 44th GST Council meetings needs to be taken. They should be withdrawn if the situation has improved-a similar ongoing exercise needs to be done in respect of all previous exemptions. Any break in the flow of credit which an exemption causes should be discouraged.
The Council needs to finalize when it would like the National Bench and the Regional Benches of the GST Tribunal to start functioning. The statute has created this important institution-but the posts have yet to be filled. The Supreme Court has frowned on the failure to fill up the vacancies in the Tribunal. This is unfortunate-Tribunals have been created for a purpose, to provide a faster and cheaper process of resolving litigation and relieving the already burdened High Court.
The Council also needs to deliberate on the need to create an apex GST advance ruling authority. The spectacle of each State giving a different ruling on the same issue flies in the face of one nation, one law. This is an issue which needs early resolution.
Several State Finance Ministers have raised the issue of a bureaucratic implementation committee working independent of the Council. The fact that while there is such a committee, it does not function independent of the Council and merely ensures implementation of the decisions taken by the Council, should be emphatically clarified. What should be ensured is adequate representation from the States in the committee.
The Council should also look closely at the GST revenue performance. The IIP data for July 2021 has seen a dip in industrial production to 11.5 percent as against 13.6 percent in the previous month. The growth in very many of the sectors when compared to June 2020, has been primarily because of the low base effect. So, while the August 2021 GST revenue at Rs.1.12 crore was good and the coming festive season should see a revival in demand especially for consumer goods, there is little room for complacency. The emphasis on enforcement should continue and technology used for a more in-depth analysis of trends and gaps. If compliance can be improved, the need for compensation would reduce.
The endeavor of both the Centre and the States should be to ensure that meeting of the Council takes place in an amicable and constructive atmosphere- in short in a spirit of cooperative federalism.
— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
Read his other columns here
(Edited by : Anshul)
First Published: IST