GST: States demand extra compensation to soothe demonetisation pain

Under law, the Centre will have to fully compensate states for any revenue loss for five years after migrating to the new tax system.

The Centre estimates total compensation to states for losses arising from a transition to GST to be around Rs 55,000 crore in the first year.

This will be met through a corpus generated by the levy of the clean environment cess on coal, also cesses to be levied on demerit goods such as tobacco, luxury cars, pan masala and aerated drinks.

Many states are now pushing the Centre for a grand bargain of sorts, seeking higher compensation for revenue loss on account of demonetisation.

States have argued that the economy-wide cash-crunch following the unexpected ban on Rs 500 and Rs 1000 currency notes in November has hurt their revenues.

State governments said that demonetisation has curtailed consumer spending, affecting states’ local tax collections and upsetting their fiscal plans for 2016-17.

“We had initially estimated that at most five states would need compensation, because 14 per cent rate of growth others would achieve. Today many states would need compensation. If you need Rs. 80,000-90,000 crore, instead of Rs. 55,000 crore, where will it come from? That’s a double whammy. States are interested that Centre should stick to its constitutional commitment,” Mitra said.

There were also disagreements among states on administrative rights over revenues coming transporting goods through high seas.

West Bengal, Kerala and Karnataka pressed for including area up to 12 nautical miles in the definition of states within Integrated GST (IGST) law.

“We couldn’t reach a consensus on a very important issue that relates to defining of a state. This is 12 nautical miles from the state. Can states charge GST from them or not? Right now states like Gujarat, Karnataka, Kerala, Maharashtra, West Bengal and Odisha are charging VAT or sales tax within 12 nautical miles. When a ship is loaded with oil or products, the tax on that is charged by the states,” Mitra said.

The draft IGST law has vested the taxation rights of goods transported through territorial waters with the Centre.

The council will now seek the law ministry’s opinion on the matter.

“Of all the issues that we discussed today, the issue of territorial waters of India could not be decided upon and will be taken up tomorrow along with dual control,” Kerala Finance Minister Issac Thomas said.

There is also significant disagreement on the issue of “dual control”.

States have demanded that assessees should be divided horizontally with Rs 1.5 crore be the cut-off base. Under this model, states would assess businesses with an annual turnover Rs 1.5 crore, while both the Centre and states would do so for businesses having higher turnover.

The Centre is pushing for a vertical division of the assessee-base without a turnover threshold. Under this model, both states and the union government will have oversight powers on a certain fixed proportion based on the number of assessees, rather than the turnover.

In the last meeting, council had finalised the drafts of the two main supplementary legislations—the Central GST Bill and the State GST Bill.

Talks will continue on Wednesday to hammer out an agreement on the issue of dual control or “cross-empowerment”.

The original deadline to roll-out GST from April 1, 2017 appears increasingly unlikely.

“I don’t think GST can happen in April, there may be one or two months delay,” Delhi Deputy Chief Minister Manish Sisodia said.

Separately, the commerce and industry ministry has pitched for exemptions under GST for export-oriented sectors such as leather, plantation, tourism, hospitality and health besides and special economic zones.

Commerce and industry minister Nirmala Sitharaman, who met the GST Council on Tuesday, also argued for keeping capital goods imports that are used as input for exports to be kept outside GST’s ambit.

Under GST, the states and the Centre will collect identical rates of taxes on goods and services. For instance, if 18 percent is the GST rate on a good, the states and the Centre will get 9 percent each called the CGST and SGST rates.

The Centre will also levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services.

The IGST mechanism has been designed to ensure seamless flow of input tax credit from one state to another.

States also want control over administering the IGST mechanism. The union law ministry, however, is of the view that only the Centre should have administrative authority over IGST.

Haryana Finance Minister Abhimanyu Singh Sindhu said the draft of model IGST was “more-or-less finalised” today. “I am optimistic that dual control will be resolved tomorrow,” he said.

A committee is concurrently working on the “classification” exercise--a comprehensive list specifying the tax rate that each good and service will attract.

The council has agreed on a four-slab structure –5, 12, 18 and 28 percent—along with a cess on luxury and `sin’ goods such as tobacco.

A bureaucrats’ panel (of states and the Centre) was subsequently expected to classify the goods and services according to this slab structure.

Agreement on the rate classification is critical to test the country-wide information technology backbone under GSTN.