The seventh GST Council meet saw the Centre and the states agree on the compensation law detailing that the Centre will absorb any spillover of revenue losses accruing on account of the adoption of the new indirect tax regime.
But hurdles in the implementation of the Goods and Services Tax are far from over. Inter-state trade, dual control and the quantum of compensation remain unresolved issues, according to West Bengal Finance Minister, Amit Mitra.
The earlier three-day discussion on compensation had taken place before the demonetisation decision was announced. It was estimated, given only a few large states would need compensation, that in the first year the Centre would pay states Rs 55,000 crore raised through the levy of cesses. But now, after the demonetisation or invalidation of Rs 500 and Rs 1,000 notes and the ensuing cash crunch, states expect tax revenues will be hit by 30 – 40 percent and hence the compensation amount needs revisiting, said Mitra. He expects the compensation amount to increase to Rs 70,000 – 80,000 crore in the first year.
According to discussions at earlier meetings of the GST Council, the Centre will impose a cess on luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, over and above the highest tax slab of 28 percent. These cesses would add up to Rs 55,000 crore, and it was decided that this amount would be used to compensate states for their revenue collection shortfall.
Mitra said, with the quantum of compensation set to rise, the Centre must look at additional routes to fund it, such as the Consolidated Fund of India, and the matter will therefore come back to the Council for further discussion.
There is a serious issue today. If Rs 55,000 crore was not enough, where will the remaining amount of money come from? The unanimous formulation was Rs 55,000 crore, every source was defined…and today that whole thing is out of the window.
Amit Mitra, West Bengal Finance Minister
Indirect tax expert Amit Sarkar said while the states will forego a large chunk of the tax collection once GST is rolled out, the implementation of the indirect tax regime will increase the total collection.
“If there is a request for higher compensation due to the adverse effect of demonetisation in the economy, it is important to note that it is the very same economy where the central government itself would be collecting taxes. So, the question arises where will that money come from?” Sarkar said.
