States slam FM plan to not extend GST compensation after June 2022

Topics GST compensation | GST Council | GST

Union Finance Minister Nirmala Sitharaman
States have expressed shock after finance minister Nirmala Sitharaman had, post the goods and services tax (GST) Council meeting on Friday, expressed her inability to extend the GST compensation to them beyond June 2022.

The states pointed out that, during the meeting, the matter was only deferred for further discussions.

Chandrima Bhattacharya, West Bengal minister of state for urban development and municipal affairs and health and family welfare, who represented the state at the meeting, said the council did not decide on extending the compensation for states beyond June 2022. 

“This was not a decision. All issues, including extending compensation to states beyond June 2022, have gone to a GoM (group of ministers),” said Bhattacharya. 

She said that the Centre was taking advantage of the Constitution’s 101st Amendment Act, which says that compensation will be paid for a period of first five years from the date of introduction of GST.  

The indirect tax regime was put into effect from July 1, 2017, and the compensation will end on June 30, 2022, unless extended by the council.

“The extension till March 2026, is something which the Centre had to give anyway, but did not give. It is giving the arrears. But, what about the next part? It will not be possible for states to run like that,” said the West Bengal minister. She added that the states strongly pitched for the extension by another five years.

Delhi finance minister Manish Sisodia also reiterated that the issue of compensation to states has been referred to the GoM, which will submit its report in two months.

Sisodia pitched for the extension by another five years. Delhi has estimated an annual loss of close to Rs 8,000 crore, if not compensated beyond June 2022.

Similarly, Kerala also pressed for giving compensation to the states for another five years. On the other hand, Punjab finance minister Manpreet Singh Badal asked for an extension of compensation to states by another three years.

Tamil Nadu finance minister P Thiaga Rajan said the non-extension of compensation to states beyond 2022 was not communicated during the council meeting. While Rajan did not attend the meeting, he was briefed about the outcome by the officer representing the state. 

“Then matter was deferred. But to say that extension of compensation beyond June 2022 was ruled out is news to me,” said Rajan.

Chhattisgarh health minister T S Singh Deo, who represented the state at the council, said the extension of compensation to states was not ruled out, unlike what the Union finance minister had said. “I hope there will be another meeting on the issue. This is the way it (the Centre) has been functioning,” said Singh Deo, who did not personally attend the council meeting but was represented by a state officer.

He added that his state will have to bear a loss of close to Rs 3,000 crore annually if the compensation is stopped post-2022. “After June 2022, we will be at a big loss as GST is a consumption-based tax,” he said. 

He added that while consuming states such as Uttar Pradesh and Bihar were gaining from the GST regime, producing states were losing out. 

“The consuming states are getting a higher revenue than what they got in the VAT (value-added tax) regime, whereas producing states have lost out badly from the GST regime,” he said. He added, “We don’t get anything on the bauxite, steel, cement, iron ore, or any other commodity that is mined and produced in the state. Chhattisgarh’s land and water resources are used but we do not get the revenues.”

The council decided to extend the compensation cess period till March 2026, but the collection will be used “purely to repay the back-to-back loans taken between 2020-21 and 2021-22”, not to further compensate states, Sitharaman had clarified at a press conference after the meeting.

Revenue secretary Tarun Bajaj, during the press briefing, had also said, “The cess collection, extended till March 2026, will be utilised to repay back-to-back loans. So, where does the compensation (to states beyond 2022) get paid from?” The cess will be used to pay the remaining amount that is payable to the states, and repay the loan, and interest on that, he added.

States are given full compensation for the first five years of introduction of GST on the assumed revenue growth rate of 14 per cent in the base year of 2015-16. Compensation cess is levied on luxury and sin items such as aerated drinks, pan masala, cigarettes and automobiles over the peak rate of 28 per cent.

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