Home >Politics >Policy >GST Council may discuss payout to states, review tax structure

The Goods and Services Tax (GST) Council will meet soon to decide on the compensation to be paid to states for shortfall in revenue after implementation of GST and for a limited review of the tax structure.

The federal indirect tax body will meet either by the end of February or early March before Parliament re-convenes after a recess, a person familiar with the discussions between Union and state government officials said on the condition of anonymity.

“The meeting will review suggestions received from various quarters for restructuring of GST, depending on what is cleared by different panels of officials who are currently examining them. The finance minister has already cautioned against frequent changes to GST rates," the person said, indicating that only a limited review of the GST may happen in the near future. The GST compensation issue is also likely to figure in the meeting, the person added.

A second official who also spoke on condition of anonymity said the proposed GST Council meeting will be scheduled as per the travel commitments of finance minister Nirmala Sitharaman, who is currently holding post-budget interactions with stakeholders in various cities. Sitharaman interacted with industry executives in Hyderabad on Sunday. The official also said that the finance minister’s caution against frequent GST rate changes only meant that it was not desirable for the GST Council to announce rate changes at every meeting. “However, if there are important issues to be addressed, those still need to be taken up at the Council. Taking decisions about what needs to be done to raise revenue collection is one of them," said the official, adding that the Centre favours increasing GST cess on select goods which will help in mobilizing resources for compensating states for GST revenue shortfall.

States want full compensation for their GST revenue shortfall, although the Centre is not in a position to find fresh resources in case of a shortfall in proceeds from a cess levied on luxury and sin goods.

Key worries on top of the mind of central and state governments concern revenue buoyancy, correcting anomalies in the tax structure and increasing compliance.

Sitharaman said in Rajya Sabha on Tuesday that the Centre will share with states the amount of cess collected so far this fiscal and dues, drawing from what was collected from previous years. The minister did not say what would be the approach in case the cess collection is not sufficient to meet the compensation requirement. The GST Council is expected to find a solution to that eventuality, which will be crucial to the trust between the Centre and states and GST’s stability. Neither the Centre nor the states alone can take decisions at the Council.

The Centre expects to collect 98,327 crore by way of cess by 31 March, according to FY21 budget documents. The budget has scaled down the estimate of GST proceeds for FY20 by 10% from what was projected at the start of the fiscal.

The suggestions received so far for a GST rejig include fixing the flaw that have led to shortfall in tax collections—tax liability on final product remaining lower than on raw materials which force businesses to seek refunds. Measures to improve compliance too could help in addressing the revenue worries but it is not an easy task.

A senior executive in an automaker said the auto parts sector, which is worth about 1 trillion, has several small players, many of whom avoid taxes. Enforcing tax compliance on such entities without affecting economic activity will also be a task.

“Invoice matching is the soul of GST. That has not happened yet the way it was intended. Besides, when there is inverted duty structure, it is an anomaly that acts like a bait to the assessee to claim fake input tax credit. Now, further reforms in GST will be like a tightrope walk. You have to catch evaders and at the same time, avoid harassment of honest taxpayers," said a third government official, who also spoke on condition of anonymity.

“In the past 30 months, GST has encountered multiple challenges and it is now at an inflexion point where it has the potential to become both a business simplifier and revenue grosser," said M.S. Mani, partner, Deloitte India.

Rajesh Gupta, co-founder and director, Busy Infotech Pvt. Ltd, an accounting software maker, said small businesses have to pay special attention to GST compliance and reporting requirements.

“Adequate care has to be taken in considering those transactions that have not been accounted for in the books but are subject to GST. Any discrepancy in the above might lead to non-reporting or incorrect reporting to the GST authorities," Gupta said.

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