GST and compensation cess review on cards as collections fall short

If states' GST revenue does not grow by at least 14%, the Centre pays them the difference, after every two months

Under pressure to compensate states amid subdued cess collection under the goods and services tax (GST), the government is mulling revision in GST rates and compensation cess for various items.

Acknowledging that the compensation requirements of states will ‘unlikely’ be met from the cess collected, the government has written to states seeking suggestions for revenue augmentation, which may be discussed in the next GST Council meeting, scheduled to be held in the second fortnight of December.

This comes as the Centre defaulted on GST compensation to states for August and September, prompting some states, including Kerala and Punjab, to consider legal recourse.

The letter sent to the state GST commissioners, reviewed by Business Standard, said that “lower GST and compensation cess collections have been a matter of concern in the past few months… the compensation requirements have increased significantly and are unlikely to be met from the compensation cess being collected”.

It further sought suggestions with respect to compliance and rates to help augment revenues. This includes review of items currently on the exemption list. The exemption list covers essential commodities like grains, vegetables, fruit, etc.

Besides, it has asked for proposals on review of GST and compensation cess rates for various items. Compensation cess is levied on a few items in the 28-per cent GST slab, such as automobiles, cigarettes, and aerated drinks. For the automobile sector, the cess ranges between 1 per cent for small cars and 22 per cent for sport utility vehicles.

“It is also being examined if more items under the 28 per cent category can attract compensation cess,” said a government official.

This year, in the first six months, while the Centre collected compensation cess amounting to just above Rs 46,000 crore, the compensation actually released to states has run into Rs 66,000 crore. On the collection side, while the fall in auto sales reduced the collection, the overall crunch in states’ GST revenue raised the need for compensation to be released.

Under the law, if states’ GST revenue does not grow by at least 14 per cent, the Centre pays them the difference, after every two months.

The last compensation of Rs 28,000 crore was disbursed in August for the previous two months.

Cess collections under the GST to compensate states for the revenue loss have fallen short of requirements in the current fiscal year on account of slowdown in demand.  Rajasthan’s outstanding compensation dues for August and September stand at Rs 4,400 crore, Punjab Rs 2,100 crore, Delhi Rs 2,355 crore, Kerala Rs 1,600 crore, and West Bengal Rs 1,500 crore.

Madhya Pradesh has fared the poorest in GST collection in 2019-20 (FY20), raking in 30 per cent of the annual target. Kerala, Punjab, and Tamil Nadu have collected about 33 per cent, shows the data on the Comptroller and Auditor General of India website.  

States are demanding an extension of the compensation period by another three years, beyond the stipulated 2021-22, propelled by their under-confidence about economic revival and buoyancy in revenue collection. This will lock their annual revenue growth at a minimum of 14 per cent, irrespective of the actual collections till 2024-25.  

Kerala Finance Minister Thomas Isaac said last month that not releasing compensation could be the Centre’s pressure tactics to revisit the compensation package promised to states under GST, which assumed a growth rate of 14 per cent in revenue. “We will take legal recourse if the Centre does not release compensation. If cess collection is not adequate, let the Centre borrow and extend the cess period by another two-three years,” Isaac had told this newspaper.

After plummeting to a 19-month low in September at Rs 91,916 crore, GST collections recovered to Rs 1.03 trillion in November, posting a 6 per cent year-on-year growth on the back of festive demand. Yet collections are lower than the rate needed to meet the steep target for FY20. The government’s monthly GST collection target is around Rs 1.18 trillion.  

The exchequer is staring at an overall shortfall of over Rs 2 trillion for the fiscal year. A 12-member panel comprising officers from the Centre and states was formed in October to recommend measures for revenue augmentation in GST. The panel is examining a mechanism to plug evasion loopholes and increase rates where necessary. It is yet to submit its report.