As States Push for GST Compensation for 3 more years, No End to Cess Pain

If States have their way, then be prepared to pay cess on automobiles, aerated water and cigarettes for three more years. Many of the States have urged the 15th Finance Commission to extend the period for compensation.

The Goods & Services Tax (Compensation to States) Act, 2017 provides for compensation to the States for the loss of revenue due to the implementation of the GST. If revenue growth of States is lower than 14 per cent annually, then the compensation is to be provided out of a fund. This fund is non-lapsable and gets money through cess on products such as automobiles, pan masala and tobacco products. The compensation will be given for the first five years.

“Many of the States said the terms of the compensation should be co-terminus with the Commission’s award,” NK Singh, Chairman, 15th Finance Commission, told reporters after a meeting with its advisory council on Friday, 13 September 2019. As of now, it will be for two years from the time of the Commission’s award.

The Commission has to recommend for the devolution of funds for five years starting April 1, 2020. Two years of compensation are over and the third is on; this means the Commission’s award will cover only 2020-21 and 2021-22.

GST Council meet on Sept 20

Singh will address the GST Council meeting on September 20, when the issue of compensation is likely to come up.

The GST Council has to decide on any change in the compensation, after which the Centre will have to amend the Goods and Services Tax (Compensation to States) Act, 2017 to extend the term beyond five years.

Singh also said that the present Commission could continue with the convention of sector-specific devolution.

“In order to bolster the investment cycle, we are not averse to recommending sector-specific devolution,” he said. Earlier, the Commission recommended sector-specific devolution for power (more specifically Discoms) and to meet State-level FRBMs (Fiscal Responsibility and Budget Management) targets.

Singh said the Commission is not obliged to accept the growth numbers given by the Finance Ministry or as mentioned in the ‘Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement’ tabled in Parliament. This means the Commission might give its own projections.

Talking about the overall economic situation, the Chairman said that the first quarter GDP growth number (5 per cent) is just one quarter number and various entities have not lowered their projection significantly.

Special treatment for J&K?

He said that the Commission is waiting for a formal communication on the change in the terms of reference from the Government on J&K bifurcation. The appointed date for J&K to become a Union Territory is October 31, after which only can the referral be made to the Commission. He admitted that time is limited to make changes in the final devolution formulae. The Commission is to submit its report by November 30.

The devolution relates only to States, while Union Territories get grants. J&K has for long been a State. Singh indicated that special consideration is to be made in its case.