Video Summary

[RSTV The Big Picture] GST: Centre State issue

Amidst lower than expectation collection through Goods & Services Tax, the Centre has sought suggestions from the States on rates including those of compensation cess and on exemption list beside others for the next GST Council meeting.
By IT's Video Summary Team
December 28, 2019

Context

  • What is Goods and Services Tax?
  • What are the current issues with respect to GST?
  • What is the best way out?
  • Conclusion

GST Centre State issue

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Context

A tussle between the Centre and States has emerged. This is with regards to States facing financial difficulties due to delayed compensation by the Centre as well as lower than expected tax collections through the Goods and Services Tax.

What is Goods and Services Tax?

  • Goods and Services Tax (GST) is an indirect tax which has amalgamated numerous central and state taxes and cesses.
  • GST is classified under Central GST, State GST and Interstate GST.
  • Various goods and services are placed under four tax slabs of 5%, 12%, 18% and 28%. This has ensured that GST is to a certain extent a progressive tax (A progressive tax is a tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer’s ability to pay).

What is GST Compensation Cess?

  • GST cess is imposed to compensate for the State’s loss of revenue due to the implementation of GST.
  • GST is charged at the time of supply and depends on the destination of consumption. For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka etc. feared a revenue loss. Thus, GST Compensation Cess was introduced by the government to compensate for the possible revenue losses suffered by manufacturing states.
  • This compensation cess is levied only for the first 5 yearsof GST regime: from 2017 to 2022.

What are the current issues with respect to GST?

  • According to the GST Act, the Centre will ensure that the tax revenue growth at 14%. If there is any shortfall, the center will compensate for 5 years. As per the GST act, the Centre has to release the proceeds every two months.  The States have been compensated only till the month of October 2019 [as of 17th December 2019].
  • Since states do not have enough fiscal space, they are facing liquidity issues. It is affecting small states and UTs more because GST proceeds constitute 40% of their revenue.
  • When GST was enacted in 2017, the CEA said that revenue neutral rate (Revenue Neutral Rate is a rate of GST at which the amount of taxes currently collected by the government and the amount expected to be collected after GST remains the same) will be around 15-15.5%. But right now that rate is 6%. Coupled with a deceleration in the economy, it has resulted in lower GST collections.
  • Additionally, revenue sources for both Centre and States have trimmed. For example, the Centre, to kickstart the economy, has cut down corporate taxes, which has resulted in Rs 60000 crore shortfall in the revenue.

What is the best way out?

for the centre Tussle between the Centre and States with regards to the GST 

Conclusion

The discussion on revenue position is critical as lower GST and compensation cess collections have been a matter of concern in the last few months.

Give the severity of the problems as far as the Goods and Service Tax is concerned and the State government  considering serious legal recourse to secure the pending amount from the Centre, Union govemrenmt, State and all the stakeholders needs to work together in order to resolve the issue.

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