On Wednesday, the finance ministers of eight opposition-ruled states met ahead of the crucial GST Council meeting to put forth their demand to be compensated for the revenue loss that states will invariably face following the implementation of GST rate reforms.
The finance ministers from Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal convened again in New Delhi on September 3 after their meeting last week to decide on how their revenues could be protected after the Council removes two tax slabs – the 12 per cent and the 28 per cent slab – from the current four-tier tax slab structure.
The 56th GST Council, chaired by Union Finance Minister Nirmala Sitharaman and comprising ministers from all states will be discussing the Centre's 'next-gen' GST reforms on September 3 and 4. The proposal is mulling retaining only the 5 per cent and 18 per cent tax slabs and axing the 12 per cent and 28 per cent slabs besides keeping a 40 per cent tax rate for specific luxury items.
Also Read: GST Council meets to discuss rate cuts, rationalisation measure
What is the current GST structure?
The states have argued that the rejig in rates and abolition of certain tax slabs will lead to lower revenues, while the Centre contends that lower prices of essential goods will boost consumption and make up for any loss in revenue in the long run.
A 4-tier GST structure of 5, 12, 18 and 28 per cent slabs was implemented from July 1, 2017, when the Centre and states agreed to subsume most of their taxes, like excise duty and VAT, into one uniform tax.
A compensation cess in the range of 1 to 290 per cent is levied on luxury and demerit goods to create a revenue pool for compensating states for the loss of revenue occurring from the exercise. The compensation mechanism was for the initial 5 years ending June 2022.
What is expected to be cheaper?
The implementation of the latest GST reforms proposal may mean slashing down of prices of commonly used items like ghee, nuts, drinking water (20-litre), non-aerated drinks, namkeen, certain footwear and apparel, medicines and medical devices – all of which will likely move to a 5 per cent tax slab from their current 12 per cent tax slab.
Other items with lower prices may include pencils, bicycles, umbrellas, hairpins – which will also be categorized in the 5 per cent slab – as well as a certain category of TVs, washing machines and refrigerators, which all likely fall in the 18 per cent bracket as opposed to the current 28 per cent slab.
Meanwhile, goods like automobiles, that are currently charged at the highest slab of 28 per cent plus a compensation cess, may see differential rates. While entry-level cars may be charged at 18 per cent rate, SUVs and luxury cars may be put in the special 40 per cent rate.
This special 40 per cent rate will also be for other demerit goods like tobacco, pan masala and cigarettes. There could also be an additional tax on top of this rate for this category.
What do the opposition-ruled states demand?
Talking about a loss of at least ₹2,000 crore to his state if the Centre’s ambitious GST reform proposal gets implemented, Jharkhand’s finance minister, Radha Krishna Kishore, said he has “no issues in approving the GST reform agenda before the Council”, if the Centre agreed to compensate the state for the loss incurred.
“I don't think the issue will come up for voting, as in a federal structure, it is the responsibility of the Centre to compensate states for revenue loss,” Kishore said.
Other states, like West Bengal, have demanded that any levy on top of the 40 per cent rate should exclusively be for sharing with states to make up for their revenue losses.
Centre's challenge
The compensation cess mechanism was initially put in place for a 5-year period until June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.
Its levy was later extended by 4 years till March 31, 2026, and the collection from this cess is being used to repay the loan that the Centre had taken to compensate states for the GST revenue loss during the Covid period.
That loan repayment is going to be over by October-November, say government officials, post which, compensation cess will cease to exist.
The challenge before the 56th GST Council remains to decide a mechanism that ensures the incidence of tax on demerit and ultra-luxury goods remains the same even after the compensation cess levy ends.
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