Centre-state talks will aim to fix structural flaws that have affected revenue
Several rounds of tax cuts and exemptions have made GST revenue-deficient rather than revenue-neutral
New Delhi: The Narendra Modi administration and state governments will hold fresh negotiations to overhaul the goods and services tax (GST) after the Union budget is presented on 1 February, said a government official familiar with the development.
Finance ministers of central and state governments will discuss restructuring GST slabs and rates as well as ways to handle a revenue shortfall and the GST compensation to states in the year starting 1 April, the official said on condition of anonymity.
The discussions between the Centre and states will revolve around finding a middle ground to fix the structural flaws that have resulted in a significant shortfall in tax collections. Tax cuts and exemptions granted in several rounds since the rollout of GST have made it revenue-deficient rather than revenue-neutral, as was originally planned. Tax cuts on consumer goods have also led to a situation where businesses are paying more taxes on raw materials than on finished products and subsequently claiming the excess paid as refunds.
Experts warned that any major change in the GST structure could unsettle the industry. “It would be prudent to allow the economy to stabilize before embarking on any changes as businesses would prefer stability and certainty in tax policies when they are grappling with global economic headwinds," said M.S. Mani, partner at Deloitte India.
The talks also assume significance considering they will address the larger question of what should be done when the Centre does not receive enough revenue to compensate states for their GST-related losses, a vital issue on which Centre-state relations and the stability of GST rests.
The budget is expected to implement the recommendations of the Fifteenth Finance Commission (FFC), which submitted its interim report to President Ram Nath Kovind and finance minister Nirmala Sitharaman earlier this month. The report focuses on sharing of tax revenue between Union and state governments. If the tax revenue that the Centre shares with states comes down in FY21 from the present 42% of the revenue pool, it could result in a showdown between the two.
The Centre is keen that states take a cut in their compensation dues, something states have resisted. The way this issue is settled will have an impact on the final report of FFC for the five years ending FY26. FFC’s suggestions made to the GST Council in September on states taking a cut in compensation did not receive an enthusiastic response from state ministers.
“It is easy to say states’ revenue loss should be met, but when there is not enough revenue, what is to be done? Now, there is a recognition among all that these issues need to be discussed," said the official cited earlier.
At the GST Council’s meeting on 18 December, officials made a presentation on revenue trends and suggestions on rejigging tax rates and slabs, but the council decided against taking it up due to the economic slowdown. States were not keen on the proposal as it would lead to a rate increase on items in lower slabs, which could impact the common man.
The council had concluded in its last meeting that raising the rate of cess on items in the highest slab of 28% will not be sufficient to raise revenue to meet the shortfall.
However, items such as perfumes, cosmetics and vacuum cleaners that were moved from the 28% slab to the 18% slab could become a target of any rate increase in future discussions. The decisions taken so far in terms of rate cuts and other relief given to businesses and traders have led to the exchequer forgoing about ₹1 trillion a year. These include raising the threshold for GST registration from ₹20 lakh to ₹40 lakh; raising the limit for composition scheme from ₹75 lakh to ₹1.5 crore; and lowering the tax rate under that scheme to producers from 2% to 1%.