HTLS 2019| ‘Unstructured rate cuts distorted GST, streamlining is on the anvil’: Nirmala Sitharaman

Finance minister Nirmala Sitharaman assured the states on Saturday that the National Democratic Alliance (NDA) government remained committed to compensating them for a shortfall in revenue from the Goods and Services Tax (GST), which, she said, may be rationalised into fewer slabs.

States and Union territories were paid Rs 28,000 crore compensation for June-July and are awaiting the payment for August-September, which had been due in October. The shortfall is “not to the level of saying that oh, the compact [between the Centre and states] has been broken,” Sitharaman said at the Hindustan Times Leadership Summit.

The law guarantees a 14% annual increase in tax revenues ,and undertakes to compensate them for any shortfall for a transition period of five years until the year 2021-22.

The Centre has not been able to pay the compensation for two months — August and September — because of a shortfall in collection of cess, charged on so-called sin goods such as tobacco products to make up the shortfall, causing some qualms over its commitment and leading to a degree of friction in Centre-state relations.

“The cess collections have been low as the sectors on which the cess applies have seen a muted growth or in some cases a small contraction,” said MS Mani, a partner at the consulting firm Deloitte India. “The items that are subject to cess may now need to be expanded in order to prop up the cess collection. In a majority of cases the cess paid is not available as an input tax credit, hence any increase in cess would lead to automatic net collections increases. Also cess need not be shared with states as part of the divisible pool of taxes, it is distributed separately as part of the compensation package.”

Sitharaman assured the states that the non-payment of compensation was temporary lapse, deflecting concerns over the delayed payments at a time when economic growth decelerated to 4.5% in the three months ended September 30,the slowest pace since March 2013 It was the sixth consecutive quarterly decline in growth. “We are not going to touch the compact… Let there be no doubt. We will honour the compact; there is no question about it,” the finance minister said.

Finance ministers of Delhi, Puducherry, Punjab and Madhya Pradesh and officials from Kerala, Rajasthan, Chhattisgarh and West Bengal on Wednesday met Sitharaman and urged her to clear their dues. The appeal came at a time when the Centre’s revenue collection numbers have raised serious concerns, forcing the federal indirect tax body, the GST Council, to call a meeting later this month to explore ways to boost collections, including raising tax rates.

According to a finance ministry official, issues related to GST collection and delay in paying compensation to states are expected to come up in the 38th GST Council meeting. The compensation requirements have increased significantly and unlikely to met from the cess, the official said on condition of anonymity.

Uday Pimprikar, tax partner and national leader of the indirect tax service practice at EY India, said lower GST collection stemmed partly from lower economic growth, which slowed to 4.5% in the three months ended September, the slowest pace since March 2013, and an effective reduction in indirect tax rates since the pre-GST era.

“The primary issue is the tepid collections and this is getting accentuated on account of the fact that the Central government is seeking to compensate a shortfall based on a compounded growth at an unrealistic 14%,” Pimprikar said.

“Logically, the avenues available with the government are to increase rates and impose a compliance regime that reduces evasion — the government would seek to do both. “

On Saturday, the chief ministers of Punjab and Chhattisgarh, Amarinder Singh and Bhupesh Bhagel, complained about the difficulties their governments were confronting because of non-payment of the compensation .

“All our sources of revenue have been passed on to the GST, so it is the responsibility of the finance ministry [to pay us]. I have not received GST collections since August, and I have had to borrow money to pay salaries. How can states function this way,” Singh said at the Hindustan Times Leadership Summit.

Baghel said that in Chhattisgarh, which is home to many heavy industries, it is vital that money goes into the pockets of local residents for it to reach the market and boost consumption, alleging that certain central policies were preventing that from happening.

On Saturday, Sitharaman spoke about the rationalisation of tax slabs under GST, in which goods and services ate taxed at four rates — 5%, 12%, 18% and 28%. “Rate structures are the GST Council’s business,” Sitharaman said at the HT Leadership Summit. “Eventually, we will of course have to rationalise [the rates]. Do we want so many slabs? Do we want to have just two or three slabs? Original intent was that we have just the three —merit, sin and the standard; just the three rates.”

Revenue secretary Ajay Bhushan Pandey told HT on December 1 that the GST Council, which is headed by the Union finance minister and is composed of state finance ministers, was aware of the fact that at some point of time, the merger of a few slabs would be required with a standard rate applying to most goods and services, a merit rate with items of mass consumption and a demerit rate for luxury and so-called sin goods such as liquor and tobacco products.

“As revenues stabilize at comfortable levels, the Council may review to rationalize the rates into a fewer slabs,” he had said.

On the rationalisation of the GST slabs, Sitharaman said the government will soon begin efforts towards putting in place a “very good, streamlined GST”.

Recalling the efforts of late former finance minister Arun Jaitley in rolling out the GST, billed as the biggest indirect tax reform in India, with the backing of Prime Minister Narendra Modi, she said the GST Act was “a good law. And it is required for a country as large as India”.

She said state governments had been equal partners in shaping the tax regime, which subsumed several central and state taxes,but a series of rate reductions proposed by stakeholders had introduced some distortions that diluted the benefits of input tax credit to the consumer.

In the “enthusiasm” for reducing tax rates, the original concept was “distorted”, she said. She also emphasised the need to further simplify compliance processes and filing of the GST returns.

In a tweet on Saturday Sitharaman also invited suggestions on simplifying the GST filing process. “A gentle reminder: Today, 7 December, all GST offices will be ready to receive suggestions on simplifying/easing the filing process. [We] Invite those interested in providing suggestions to kindly approach the nearest office,” she said in the tweet.

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