States are unlikely to immediately agree to a rejig of the Goods and Services Tax (GST) slabs given the present economic situation caused by the novel coronavirus pandemic, a senior state government official told Moneycontrol.
"GST is a consumption tax. When the whole consumption cycle is down, rejigging of tax slabs is counter-intuitive. In previous GST Council meetings, both Centre and states have agreed on this. Slab restructuring can't happen till the the effects of the slowdown wear off, not before six-to-seven months at least," the official said.
Some states have put forward the alternative to borrow from the market to settle the issue of compensation, but that has legal issues. GST Council, according to the official, is a constitutional body and its purpose is purely recommendatory in nature.
"The GST Council doesn't have borrowing powers. The attorney general has said that the council can think of borrowing from the market. But will such a borrowing have a sovereign guarantee? How does it raise money, who would guarantee it? All these legalities need to be worked out," the official said.
Finance Secretary Ajay Bhushan Pandey earlier this week informed the Parliamentary Standing Committee on Finance that the government is in no position to pay the GST share of states in keeping with the current revenue sharing formula.
It has been reported that the government had sought the advice of the attorney general of India, who said that the GST Council can decide whether a market borrowing mechanism can be worked out to compensate states for revenue losses.
The Indian economy was in a slowdown even before the COVID-19 pandemic hit India. This was reflecting in the weak economic indicators and slowing GST collection. In October, payments to states got delayed as the collection was lower than expected.
Under GST law, states were guaranteed payment for any loss in revenue in the first five years of GST implementation from July 1, 2017. The shortfall is calculated assuming a 14 percent annual growth in GST collections by states over the base year of 2015-16. States are promised compensation for any revenue shortfall till 2022, in case they go below the 14 percent annual growth since the GST rollout in 2017.
The Centre has paid the GST compensation amount that it owed to the state governments for FY20 in its entirety. On July 27, the Centre released more than Rs 1.65 lakh crore as GST compensation to states for FY20, including Rs 13,806 crore for March.
The total amount of compensation released for FY20 is Rs 1.65 lakh crore, whereas the amount of cess collected during the year was Rs 95,444 crore.