A cloud of compensation hangs over next week’s GST Council meeting

The GST Council meeting scheduled for next week in Chandigarh is likely to resolve the issue of Union and Territories (UTs) compensation, which ends on 30 June.

What’s new

Although the Center claims to be committed to paying state / UT compensation for five years under the constitutional provision, states want an extension of at least another three years after the June 30 deadline. This issue also emerged at the Lucknow Council last year, but no consensus was reached. Subsequently, during the pre-budget meeting, as well as during the last Council meeting in December, the states raised the request again.

Pursuant to Section 18 of the Constitution Act (101st) of 2016, Parliament by law, on the recommendation of the GST Council, provides for compensation of states for loss of revenue arising from the application of the tax on goods and services for a period of five years from the date of its introduction. During the transition period, US revenues were protected by 14 percent per year compared to revenues from the base year 2015-16.

Officials acknowledged that the issue of compensation would be the focus of next week’s meeting. There are two options, either to amend the extension law or to consider special grants for some countries that have lower GST collection rates. If the first option is exercised, there may be two problems – the fund and the growth rate of revenue to calculate compensation.

Catch-22 situation

Rajat Mohan, a senior partner at AMRG & Associates, said the Center was in situation 22, where it may have to take a firm stand by rejecting the state’s request, which could have political consequences. If the Center decides to take out an additional loan to finance the deficit at a time when the global recession is at stake, this could have serious economic consequences for the country as a whole.

“Should the current law be changed, streamlining rates, changing the compensation formula, cutting the exemption list and securing a loan could be sources for the Center to pay a fee to the states. Such a move will require constitutional reform in India, which will be considered at the next legislative session. “This is not a battle of the ego between the Center and the United States, but rather this action will impose a greater burden on end customers – who were the ultimate taxpayers,” he said.

Explore other options

Bipin Sapra, EY’s tax partner, said that given that future tax levies would be used mainly to pay off compensation loans, there would be a engaged discussion to find a solution. “This problem will be more acute for some countries, while some may have grown at a better rate than in previous years,” he said.

Sapra believes that given that much of the collection of benefits will go to pay off loans, the government may consider paying extra. As no new levies are proposed, given the inflationary conditions, other options need to be explored. “Compensation should also be paid differently, depending on various factors, including the increase in GST collection in the country. “While the Center and the states may differ in their compensation needs, the current rate of increase in GST gatherings will help calm the situation,” he said.

Posted on

June 21, 2022

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