Compensation Bill on GST to Include VAT Issues to States on Demonetisation Assessees

· Rs.55,000 crores Thru Cess not enough Compensation, says Amit Mitra, VAT Collections Down 30%-40%

· IGST Jurisdiction on Battle Ground between Centre and States

Centre, states fail to make a breakthrough on division of control over tax assesses.

The GST Council in its seventh meeting decided to redraft the compensation Bill to include ‘other receipts’ apart from previously agreed cess on luxury and demerit goods as the source to fund compensation, with states voicing concerns about a likely decline in their revenues this fiscal following the scrapping of high-denomination currency notes.

Even though the Council cleared most provisions of supporting draft Bills of compensation and Central GST (CGST), the Centre and the states failed to make a breakthrough over the vexed issue of division of control over tax assessees as it did not come up for discussion in the two-day long meeting.

The pending issues of dual control and draft Integrated GST (IGST) Bill will be taken up for discussion in the next meeting of the Council on January 3-4.

“Certain technical and procedural issues were cleared but the big issues are yet to be resolved. For example IGST…among other issues, many issues had to be re-brought to the GST. For example compensation…earlier formulation without demonetisation was that Rs 55,000 crore will be perhaps necessary to compensate states as per Constitutional amendment as a guarantee and that will come through cesses.

We were able to define cesses primarily on luxury, demerit goods and Centre’s environmental cess. Today, atmosphere is completely changed. Most states feel that their revenues will drastically fall in third quarter and fourth quarter, so average revenue will be significantly lower,” West Bengal’s finance minister Amit Mitra said.

He added, “Whether ruling party, Opposition party, everyone was on same page. Most states estimate at least 30-40 per cent loss of revenue in third and fourth quarter. Maybe as bad if not worse … the quantum of compensation is going to be much larger than Rs 55,000 crore. My personal estimate is that it can go easily to Rs 70,000-80,000 crore or more depending on fourth quarter results…question is where will the remaining money come from. This is an issue that has not been closed. Some thinking has to be done in this. Central government has to find the money. It will come back to GST Council with their estimates and projections. GST Council will discuss and then take a call on what can be done.”

Jammu & Kashmir’s finance minister Haseeb Drabu said, “One paragraph of compensation Bill was redrafted. States did not want the source of compensation to be limited only to cess, so we decided to phrase it as cess and other receipts, which can include borrowings also. Those other receipts will be decided by the GST Council, which it will then suggest to Parliament.”

The GST Council also made changes to the compensation mechanism to allow bi-monthly payment to states instead of quarterly payout decided earlier.

After the meeting, finance minister Arun Jaitley said, “…on the compensation law, it is cleared that the states will be compensated 100 per cent for loss which is directly attributable to GST implementation for a period of five years…that basic draft has been approved. There was one clause, in particular, with respect to source of compensation fund, which the language will be redrafted and the legally vetted language will be placed before the next meeting of the Council.”

Last month, Jaitley had said that there is a rough calculation of Rs 50,000 crore required in the first year of compensation. The Council had decided to levy a cess on luxury and demerit goods over and above the higher rate of 28 per cent under the proposed multi-tier GST rate structure to create a compensation fund to pay states for their revenue losses after GST rollout. With some issues pending, the government will find it tough to meet its initial April 1, 2017 deadline for GST rollout. However, when asked if April 1 deadline still stands, Jaitley said, “I am trying my best to do that…left to myself, I would like to do that.”

On the pending items, Jaitley said, “If you ask me what are the principal residuary items left, the main item of course is the IGST and dual empowerment issue. The second is the legally vetted language which will be placed in the next meeting on January 3-4.

Jaitley added that State GST (SGST) Bill, which is a mirror image of CGST bill, has been approved by the Council. Two issues pertaining to IGST Bill related to definition of territory of state and whether powers under IGST will be of Centre or will be shared with states will come up for discussion in the next meeting, he said.