GST council meeting takes no decision on extending compensation to states

The (GST) Council’s two-day meeting concluded on Wednesday without any decision on extending compensation to states – for revenue loss on account of the regime’s implementation five years ago – beyond June 30. This was despite at least two dozen states raising the issue.

The Council, however, took significant measures to simplify the structure of by revising rates on some goods and services and removing exemptions on several mass-consumption packaged items with effect from July 18.

It deferred the proposal to tax online gaming at flat 28 per cent, on a par with gambling, and asked a group of ministers (GoM) to re-examine the matter by July 15. The Council will meet again in the first week of August, in Madurai, to take a decision on this.

On the issue of compensation cess, while the Centre had agreed in principle to extend it until March 2026, many states (including some ruled by the Bharatiya Janata Party) had sought an extension of the regime for a few more years, or changes in the revenue-sharing formula to meet the shortfall.

“Sixteen states spoke on issue of compensation cess. They broadly stated that the compensation can be continued for at least a few years, if not five years,” said after the Council meeting. “Not all of them asked for an extension. Three or four spoke of evolving their own revenue stream to break from the compensation mechanism.”

Chhattisgarh T S Singh Deo told Business Standard that the Council should have given a road map or guidance on the compensation, and not left the matter undecided. Since the compensation regime is to be discontinued from June 30, he said, the Council was expected to take it up on priority. Deo had written to Sitharaman on Tuesday, stating that the Council should rework the method for sharing of revenues by the Centre and states.

Even states like Uttarakhand and Puducherry – both ruled by the BJP – had appealed for a relief, as their Budgets were severely stressed.

Kerala K N Balagopal said the compensation mechanism for states should be extended to make good the revenue loss. “Despite a pitch from almost all states, there was no conclusion. We are expecting the Centre to come back with some solution to this,” he said.

According to revenue growth data collated for the Council meet, only five of the 31 states and Union Territories – Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim – had registered a higher revenue growth rate than the protected revenue rate for states under GST in 2021-22. However, overall revenue shortfall of all states had narrowed in FY22 when compared with the previous year. Puducherry, Punjab, Uttarakhand and Himachal Pradesh had recorded the widest gap between protected revenue and post-settlement gross state GST revenue in FY22.

A senior government official explained that the compensation regime was ending on June 30 under law. “Now for any extension, the Constitution needs to be amended. That cannot happen overnight.”

When GST subsumed 17 central and state levies from July 1, 2017, it was decided that states would be compensated for any revenue loss for five years (that ends on June 30, 2022). However, during the pandemic, states suffered losses and sought an extension for compensation cess, and the Centre is known to have decided to extend it until March 2026. This is to repay Rs 1.1 trillion borrowed in FY21 and Rs 1.59 trillion in FY22 to meet a part of the cess collection shortfall.

On rate rationalisation and removal of exemptions on some packaged mass-consumption items like curd, lassi, buttermilk, foodgrains, cereals, honey, papad and a host of other packaged food items, the Council decided to make these taxable and put them in the 5 per cent bracket with effect from July 18.

Hotel rooms with tariff below Rs 1,000 per night and hospital rooms with a daily tariff of over Rs 5,000, will not attract GST. The Council also suggested phasing out of tax exemption on services provided by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi). It also recommended withdrawing GST exemption available for cheques – loose or in the book form – and favoured a GST rate of 18 per cent. And, it agreed to hike rates on items like tetrapack, knife, printing ink, LED lights, and so on.

On apprehensions over these rate hikes and the withdrawal of exemptions, Sitharaman said: “Inflation is not the concern of any particular state. All ministers are aware. They are all looking at a system while keeping that in mind. So, the Council’s decisions have not been taken in isolation. Elected representatives who are part of the are fully conscious of the decisions taken.”

Suspense on online gaming

On the taxing of casinos, online gaming, horse racing and lottery at 28 per cent, the asked the GoM headed by Meghalaya Chief Minister Conard Sangma to re-examine the proposal, pending a consultation with stakeholders. The panel was asked to consider submissions of stakeholders again on the valuation mechanism and submit its report by July 15.

The GoM had recommended that online gaming be taxed at the full value of the consideration, including the contest entry fee paid by a player to participate in a game. In cases of race courses, it had suggested that GST be levied on the full value of bets pooled in totalisators and placed with bookmakers. It had also recommended that all games be taxed at the highest GST rate of 28 per cent – without any distinction between games of skill and games of chance.

Besides these, the Council also decided on Wednesday to form a separate GoM in order to examine the framework of a GST tribunal in view of pending litigation of GST-related matters.

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