Seven states that are not ruled by the Bharatiya Janata Party have demanded that the Centre should compensate tax losses under the provisions of the Central Goods and Services Tax Act at the earliest, reported The Hindu on Thursday.
The states’ finance ministers also sought to increase the borrowing limit to 5% of the Gross State Domestic Product – the total value of goods and services produced within a state in a financial year. The demands were made during a meeting held by Rajasthan Urban Development and Housing Minister Shanti Dhariwal on Wednesday, ahead of the GST council meeting on May 28.
The 2016 GST Constitutional amendment, which introduced the Goods and Services Tax, assures states of compensation for loss of revenue for five years between 2017 and 2022, according to BloombergQuint. The GST council later added a 14% compounded growth in states’ GST revenue every year till 2022 in order to calculate the revenue losses. The Centre also imposed a cess on sin goods, or items that are considered harmful to society and individuals, to fund the revenue assurance.
Wednesday’s meeting was attended by finance ministers Amit Mitra from West Bengal, Manpreet Singh Badal from Punjab, Rameshwar Oraon from Jharkhand, TS Singh Deo from Chhattisgarh, KN Balagopal from Kerala and PTR Palanivel Thiagarajan from Tamil Nadu. Rajasthan Chief Minister Ashok Gehlot holds the finance portfolio, while Dhariwal represents the state government in the GST Council.
A day later on Thursday, Dhariwal said the finance ministers would remain united on the matter and raise them before Union Finance Minister Nirmala Sitharaman at the council meeting.
“The Union government should respect the spirit of cooperative federalism and release compensation for the GST revenue losses without delay,” Dhariwal said. He said that the compensation would help them mitigate losses caused by the coronavirus pandemic.
The minister also supported the demand of the finance ministers to appeal to the Centre to make all goods related to the coronavirus tax-free, reported PTI. He added that the compensation period should be extended for five more years beyond 2022.
Extend compensation period by five more years, demand states
Several states are demanding an extension of the compensation period. Deo told BloombergQuint that the Centre should consider extending the five-year compensation period as the economy has slowed and there is no growth.
“Any pick-up in growth is on a negative base of last year,” he said. “This is the time for the central government to step in. If it [the GST] is not working, then you have a common rate of taxes in the country and you disband the GST Council and the idea of cess for protected income.”
Praveen Chakravarty, a political economist with the Congress, said that the GST was being held a loose thread called revenue guarantee and that it will break in July 2022. So the choice is clear, if you want GST, you tighten that thread again,” he said. “There has to be an effort to rebuild trust between Centre and states.”
Chakravarty said that the council needs to talk about the specifics of the extension. He added that the notion of revenue guarantee is in the Constitution and it needs to be fulfilled. “It can come from a cess levy, it may come out of the Consolidated Fund of India,” Chakravarty said.
Badal had also written to Sitharaman on Monday, saying that the GST regime has failed to deliver on its promises so far. Although he did not demand for the extension of the compensation period, he listed a few measures to improve the GST such as reducing the tax burden and reviewing tax rate to eliminate evasion chances.