Packed agenda for first in-person GST Council meeting in nearly two years

File image of Finance Minister Nirmala Sitharaman (Image: Twitter/@FinMinIndia)

Finance Minister Nirmala Sitharaman will chair the 45^th meeting of the Goods and Service Tax Council in Lucknow on September 17. It will be the first in-person meeting of the all-powerful federal body in nearly two years. And given the loaded agenda, it is likely to be an action-packed one.

The Finance Minister and her counterparts from States and Union Territories are expected to discuss the extension of compensation to states beyond 2022.

They are also likely to deliberate on rationalizing an inverted duty structure on the supply chain of certain items, bringing petrol and diesel under GST, extending the GST exemption on Covid-essential items, and deciding the future of profiteering cases since the tenure of the National Anti-Profiteering Authority ends in November.

"The GST Council is physically meeting after a long time, and the industry is keenly looking forward to this meeting. Issues such as bringing petroleum products, natural gas under GST ambit, capacity-based taxation for tobacco products, future of compensation levy, GST rate rationalizations are expected to be discussed in the meeting,” said Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co.

“It will also be interesting to see if the GST council extends the GST exemptions for essential COVID supplies for a further period,” Bose said. The last in-person GST Council meeting was held in December 2019 in New Delhi. Since then five more meetings have been convened through video conferences.

Compensation Extension

While the centre has in principle agreed to extend the compensation cess and the shortfall due to states, the modalities and details will be discussed at the Lucknow meeting. It is understood that the centre will present various options for a compensation formula

When the GST came into being, states had agreed to join the new tax regime provided they were compensated for any revenue loss in the first five years from July 1, 2017, to June 2022. It was in October 2020 that the Council had decided, in principle, to extend the compensation beyond the original five years.

Section 18 of the Constitution (101 amendment) Act, 2016 and Section 7 of GST (Compensation to State) Act, 2017 permits the loss of revenue will be compensated to states at the end of every two months for five years.

The shortfall is calculated assuming a 14 percent annual growth in GST revenue over the base year of 2015-16. One of the points of discussion is whether to stick to this assumed rate beyond 2022.

“The pandemic has hit the finances of the centre as much as the states. To compensate states at an assumed rate of 14 percent GST growth, something which was decided pre-Covid, that is something we will discuss with states,” a senior official told Moneycontrol.

For the current 2021-22 financial year, the centre has already released Rs 75,000 crore to the states and union territories to compensate them for the shortfall in GST revenue.

Petroleum Products under GST

More than four years after the implementation of the nationwide GST, the Council seems finally ready to discuss bringing petrol and diesel under GST. However, this issue is understood to be a complex one, and it will take many meetings before a decision is made on the issue.

This comes at a time when petrol and diesel prices are reaching record highs across the country due to incessant hikes in rates since May. Central and state-level taxes contribute about 55 percent of the retail price of petrol and 51 percent for diesel.

The Centre’s excise duty collection in 2020-21 was Rs 3.9 lakh crore, about 62 percent higher than the Rs 2.4 lakh crore in 2019-20. Out of the Rs 3.9 lakh crore, Rs 3.45 lakh crore was collected only in excise duties on petroleum products. In just the April-June quarter of the current financial year, the Centre collected about Rs 94,181 crore in revenue through excise duties on petrol and diesel.

States have also used their taxation power on fuel to raise resources. The price of fuel differs from state to state, depending on the rate of local taxes like VAT and also freight charges in that state, as the attached charts show.

Inverted Duty Structure and Other issues

"It is essential to overcome the challenges arising from the inverted duty structure on certain products, in addition to extending relief for pharma products required for treatment of Covid patients,” said MS Mani, Senior Director, Deloitte India.

The Council will take up the matter of inverted duty structure on the advice of the Supreme Court.

A recent judgement by the apex court had clarified that a refund of unutilized input tax credit will not be available in case of a refund due to an inverted duty structure. The Court in its judgement has accepted that there is an anomaly in the formula for computing the quantum of eligible refund and has urged the GST Council to reconsider and take a policy decision regarding the same.

The Council will also take up the matter of how to deal with profiteering cases. It may also take a call on extending the concessional rates for Covid-19-related drugs, including remdesivir, by another three months.

The Council will decide whether the term of the National Anti-Profiteering Authority will get over after November 30, and instead, the Competition Commission of India (CCI) or any other authority could be given its mandate.