GST Council splits on state compensation; surcharge on luxury goods, tobacco extended

New Delhi: The Goods and Services Tax (GST) Council on Monday decided to extend the surcharge on taxes over luxury goods such as cars, and tobacco products beyond June 2022, but failed to reach a consensus on ways to compensate states for loss of tax revenue.

The panel, which decides on tax rates and structure after 17 central and state taxes such as excise duty and VAT were subsumed into Goods and Services Tax (GST), will meet again on October 12 to thrash out the state compensation issue, Union Finance Minister Nirmala Sitharaman said after a marathon eight-hour meeting.

The Council was divided on political lines, with 10 states ruled by non-BJP and its supporting parties, opposing the Centre's proposal of states borrowing to meet the shortfall in receipts. The state compensation issue appears headed for voting in the Council, with the option chosen by majority states being implemented.

When the GST was introduced in July 2017, states were promised a 14 per cent incremental revenue over their last tax receipts in the first five years of GST rollout. This was to be done through a levy of a cess or surcharge on luxury and sin goods, but the collections on this count have fallen short with the slowdown in the economy since last fiscal.

To make up for this, the Centre suggested that the states can borrow against future compensation receipts.

Sitharaman said 21 states accepted one of the two borrowing options suggested by the Centre but 10 states did not agree. Kerala Finance Minister said 10 states, mostly ruled by Congress and Left, want the Centre to borrow and give the money to states. Sitharaman said the GST Council agreed to extend the levy of compensation cess beyond five years.

This year till now, whatever has been collected under the Compensation cess which is approximately 20,000 crore will get disbursed by tonight to all the states: Finance Minister @nsitharaman pic.twitter.com/sXOUn9JkX5 — PIB India (@PIB_India) October 5, 2020

The surcharge on cars and other luxury goods and tobacco products varies from 12 per cent to 200 per cent on top of the highest GST rate of 28 per cent. It was due to expire in June 2022. She, however, did not give the duration for which this levy has been extended.

Briefing reporters after a marathon meeting of the panel, Sitharaman said even through 21 states have opted to borrow, she was open for more discussion on the issue of funding compensation to get the remaining states on board.

"It is true that 20-21 states have written that they are opting for Option 1. To be fair to the Council, we did take a decision that the cess will have to be extended beyond the 5 years for which originally it was mandated. So that the fact that the borrowing has to happen, the fact that the interest on borrowing will be paid through the cess was well appreciated and welcomed by all. 
"That the proposal on the table to have collection of cess should be beyond 5 years was cleared," she said.

Sitharaman said that some states wanted that the Centre calculates the GST shortfall amount at Rs 1.10 lakh crore, instead of Rs 97,000 crore. This was agreed to by the Centre before the 42nd meeting of the Council.

The Centre in August gave two options to the states to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from the market and has also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.

The non-BJP ruled states are at loggerheads with the Centre over the issue of funding the shortfall. Chief Ministers of 6 non-BJP ruled states ? West Bengal, Kerala, Delhi, Telangana, Chhattisgarh and Tamil Nadu, have written to the Centre, opposing the options which require states to borrow to meet the shortfall.

"So the question was it could be that 20 states would have chosen Option 1, but there are some of us which have not chosen any. And from those which have not chosen any, the argument was it is the Centre which borrows... It was felt that you can't decide on the basis of 21 which have written to you, we need to talk further.

"I was also gently reminded that I can't take anybody for granted. I don't take anybody for granted, I have said this there and I am saying it here. I have always been open for more and more talk which is what I have said there and I am saying it here too," Sitharaman said.

The panel will meet again on October 12. Explaining the repayment schedule of the Council, Sitharaman said interest on the borrowed amount would be the first charge on the cess, which gets collected beyond the five years.

The next charge would be 50 per cent towards the principal amount, which gets borrowed that is Rs 1.10 lakh crore and then the remaining 50 per cent would be towards COVID affected compensation.