The GST Council is scheduled to meet over two successive days starting Tuesday for the first time after the introduction of the new indirect tax regime. It will also be the first meeting in the current calendar year.

It has detailed agenda which mainly involves exemptions on goods and services, some rate rejig, bringing online gaming casinos and horse racing under one rate (28 per cent), strengthening compliance, improved norms for scrutiny, relief to small businesses wanting to sell through e-commerce operators, e-way bill for gold beside others. However, the issue of compensation to States and Union Territories (with legislature) beyond June 30 is expected to be vehemently debated

Just two days before the meeting, the Finance Ministry notified the extension of levying compensation cess under the GST regime till 2026. However, this does not mean States will continue to get a compensation till that period. Money collected through cess between July 1, 2022 and March 31, 2026 will be used to repay principal interest and pay interest for borrowing ₹2.69 lakh crore, that is taken to compensate for revenue shortfall in FY2020-21 and FY 2021-22.

Recommendations

As per Section 18 of the Constitution (101st) Act, 2016, Parliament “shall, by law, on the recommendation of the GST Council, provide compensation to States for loss of revenue arising on account of implementation of the Goods and Services Tax for five years from the date of its implementation.” During the transition period, States’ revenue is protected at 14 per cent per annum over the base year revenue of 2015-16. That period is coming to end on June 30

Bi-monthly GST compensation to States for 2017-18 and 2018-19 was released on time out of the compensation fund. States’ protected revenue has been growing at 14 per cent CAGR, but the cess collection did not rise in the same proportion. Covid-19 further increased the gap between the protected and the actual revenue receipt, including a reduction in cess collection. Now, States are seeking an extension of compensation for at least three more years beyond the June 30 deadline. This issue had surfaced at the Lucknow meeting of the GST Council last year, too, but no consensus was arrived at. Subsequently, during the pre-budget meeting and also at the last Council meeting in December, States had raised the demand again.

There could be three options, extending the compensation to States/UTs after lowering the rate of protected revenue, provide compensation to few of the States which have been affected severely due to Covid or reject the demand totally. Now, the Council will take a final call.

GoM reports

The Council is scheduled to consider reports by four Group of Ministers (GoMs). One is on online gaming, casinos and horse racing, second one is on on high-risk tax payers, third one is on e-way bill for gold and fourth one (only interim) on rate rationalisation. Among the four, eyes will be on first GoM which has recommended 28 per cent GST for online gaming, casinos and horse racing. It also recommended uniform valuation norms.

GoM on high-risk tax payers suggested various measures such as making biometric authentication mandatory for the registration of high-risk applicants under GST, using Artificial Intelligence. These measures would aim at identifying risky behaviour by new registrants or applicants, and sharing the information with the back office of the field officer to enable physical verification of such applications. It also recommended AI-based interdiction to generate reports that would enable officers to make post-registration verification and take other necessary actions for high-risk taxpayers.

With inflation at high along with revenue consideration, not much action is expected on rate restructuring. In fact, GoM on rate rationalisation is yet to finalise its report but has readied an interim report which has suggested doing away with exemptions.

On the table

-       Rejig of tax rate, clarification for 14 goods including cut and polished diamond, tetra packs, EV, etc.

-       No change in GST rate, classification for 113 goods including dairy products such as ghee, butter, flavoured milk, tobacco products, Carbonated Beverages of Fruit Drink or Carbonated Beverages with Fruit Juice, khadi products, etc

-       Circular for clarification about 18 per cent GST on ice cream parlour

-       Lowering of GST on ropeway ticket to 5 per cent

-       Margin scheme for tour operators

-       GoM report on online gaming, casinos and horse racing

-       Interim GoM report on exemption

-       GoM report on e way bill for gold etc

-       Relaxation for small businesses from registration for selling goods through e commerce

-       Discussion on Compensation to States beyond June 30, 2022

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