The 40th meeting of the GST Council is proposed to be held on June 12. While all the previous meetings have had their share of importance in formulating GST which still remains a work-in-progress, this meeting is critical as decisions on two major areas of concern are expected — raising funds to compensate the States and tinkering with GST rates to buffer the impact of Covid-19.

It may not be a good idea to tinker with GST rates now as the rates appear to have found a comfort level amongst taxpayers. Release of the GST revenues has been deferred due to the lockdown, but it is obvious that the numbers will not make pleasant reading. The GST Council meeting is expected to discuss the impact of Covid on GST revenues and ways to bridge the gap.

Representatives of State governments are expected to voice their own version of “vocal for local” in the Council meeting — becoming vocal to levy local taxes since the promised GST compensation from the Centre is in arrears and prospects of them being settled in full do not appear to be too bright in the near future.

Under GST law, States were guaranteed to be paid for any loss of revenue in the first five years of the GST implementation from July 1, 2017. The shortfall is calculated assuming a 14 per cent annual growth in GST collections by States over the base year of 2015-16.

The numbers articulate the gargantuan task before the Centre. On an average, the monthly GST compensation cess requirement is to the tune of ₹14,000 crore while the cess collection on an average is only ₹7,000-8,000 crore per month — a gap of almost 50 per cent month on month. After the last release of ₹19,950 crore to States made in February for the months of October and November 2019, the Centre has released a total of ₹1.20 lakh crore in 2019-20 against collection of ₹95,000 crore. No State/UT has been paid compensation for any period beyond October-November. Some amount was released in May 2020.

The first thing the GST Council should do is to inform the State Governments that the 14 per cent increase in collections will be paused for at least a year. One is not sure if there is a force majeure clause in the GST Compensation Cess agreement with the State governments, but the GST Council should do whatever it can to stop the 14 per cent clock from ticking. Once things improve, this can be re-looked into.

Tax on exports

Considering the sheer size of the problem, the shortfall is not going to be made good by tinkering with GST rates or compensation cesses. The GST Council should look into areas where the numbers are equally large — the exports sector, for instance.. Most of the goods and services exporters don’t pay GST because they get an exemption through a letter of undertaking. In addition to this, these exporters get a refund of the taxes paid on their inputs, thereby creating a situation wherein the government does not get any GST revenues but funds the exporters the GST paid by them on their inputs.

While this is necessary in normal times to get India to export more, these are not normal times. Assuming that actual exports are ₹400 billion due to the impact of Covid, a 2 per cent levy would get ₹8 billion into the treasury. State Governments can be compensated on the basis of a ratio of exports from their State. In addition, the refund of ITC on inputs can be curtailed to 50 per cent of the eligible amount for a couple of years with the balance foregone.

State Governments will be hoping that the GST Council takes major decisions at the 40th meeting instead of worrying about the rate of GST on matchboxes and mobile phones.

The writer is a chartered accountant

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