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NEW DELHI : The central government is sympathetic to states’ fiscal woes but a decision on extending the Goods and Services Tax (GST) compensation beyond 2022 is unlikely soon given the fiscal constraints, several people said.

At Friday’s GST Council meeting in Lucknow, states and the central government will review their revenue position as well as demands from states for GST compensation beyond 2022 but there is no clarity on how this will be financed.

“We are sympathetic to states’ fiscal concerns and are exploring ways to augment their revenue by administrative means including by correcting tax anomalies so that thenala financial position of states improve. We will decide on GST compensation as things pan out," said a person privy to the Centre’s views on the subject without committing anything on extension of GST compensation for an extended period.

Kerala finance minister K.N. Balagopal told Mint that several state governments have sought a full five-year extension of GST compensation beyond 2022.

“We are seeking continuation of GST compensation in its present form for another five years. We are looking forward to a positive outcome," said Balagopal.

A state government official, who is privy to Centre-state discussions and spoke on condition of anonymity, said that a decision on extending GST compensation beyond 2022 was unlikely on Friday.

“The Constitutional and legal requirement for compensating states for GST revenue shortfall for five years ends in 2022. The GST cess is already committed for several years beyond 2022 (to finance the debt raised to pay part of the GST compensation requirement in FY21 and FY22). To finance GST compensation beyond 2022, there has to be a source of revenue and there is no clarity on that," explained the official. The focus would be on augmenting revenue collections to improve state finances, the person said.

Extending GST compensation in its current form means states’ protected revenue for computing the compensation amount goes up by 14% annually from the FY16 base year. Any gap between this protected revenue and what is actually collected by the states has to be compensated by the Centre. Finding resources for this would be a big task.

The Kerala FM also did not find any merit in bringing petrol and diesel within the ambit of GST at this juncture. “We prefer the taxation of petrol and diesel to continue in the present form," Balagopal said.

A Kerala high court order in June on a public interest litigation seeking inclusion of petrol and diesel in GST had given rise to expectations that the autofuels could be included in the new indirect tax regime. However, this could mean central and state governments sacrificing their revenue receipts from these products at a time both are facing fiscal pressures. Judicial pronouncements are placed before the Council but a change in taxation of petroleum products is unlikely soon.

The Council is expected to extend tax relief granted to certain covid-19 related medical supplies till December-end.

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