The GST Council meeting, scheduled to take place in Chandigarh next week, is likely to thrash out the issue of compensation to States and Union Territories (UTs), which is coming to end on June 30.

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While the Centre has maintained that it is committed for compensation to States/UTs for five years as per the Constitutional provision, States are seeking extension for at least three more years beyond the June 30 deadline. This issue had surfaced in the Lucknow meeting of the Council last year, too, but no consensus was arrived at. Subsequently, during the pre-Budget meeting and also during the last Council meeting in December, States raised the demand again.

As per Section 18 of the Constitution (101st) Act, 2016, Parliament shall, by law, on the recommendation of the GST Council, provide for compensation to States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years from the date of its implementation. During the transition period, the States’ revenue is protected at 14 per cent per annum over the base year revenue of 2015-16.

Officials admitted that the issue of compensation will be in focus in the next week’s meeting. There are two options, either to amend the law to extend the due date or consider special grants for some States which have lower growth of GST collection. If the first option is exercised, there could be two problems — fund and rate of revenue growth for calculation of compensation.

Catch-22 situation

Rajat Mohan, Senior Partner with AMRG & Associates, said the Centre is in a catch-22 situation where it may be required to take a tough stance by refuting States’ request which may have political consequences as well. If the Centre decides to take a further loan to fund the deficit at a time where global recession is on the cards, it can cause serious economic repercussions for the country as a whole.

“In the instance that the prevailing law is amended, rate rationalisation, modification of the compensation cess formula, snipping of exemption list and securing a loan could be sources for the Centre to pay cess to the States. Such a move will necessitate a constitutional reform in India, which will be addressed in the next legislative session. It is not an ego battle between the Centre and the States, rather, this action will impose a higher burden on end customers — who have been the ultimate taxpayers,” he said.

Exploring other options

Bipin Sapra, Tax Partner with EY, said given that the future cess collections will majorly be used for payment of compensation-related borrowing, there is going to be an involved discussion to find a solution. “This problem will be more acute for some States, while some may have grown at a better rate as compared to previous years,” he said.

Sapra felt given a large chunk of compensation cess collection will go towards payment of loans, the government may look at payment of additional funds. Since no new levies are proposed, given the inflationary conditions, other options need to be explored. “There would also be a need to pay compensation differentially, depending on various factors, including the growth of GST collections in the State. While the Centre and States may differ on compensation needs, the current growth rate of GST collections will help in assuaging the situation,” he opined.

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