The Group of Ministers on Rate Rationalisation gave its in-principle support Thursday to the Centre’s proposal to overhaul the Goods and Services Tax (GST) design, even as member states raised concerns about potential revenue loss on account of the rate rationalisation.
Six days ago, Prime Minister Narendra Modi, in his Independence Day address, announced the next big phase of reforms under the GST regime by Diwali, a gift for the common man, small entrepreneurs and MSMEs, in terms of reduced tax burden. The Centre has suggested replacing multiple slabs – 5 per cent, 12 per cent, 18 per cent and 28 per cent – with a broad two-slab structure – 5 per cent and 18 per cent – in addition to a 40 per cent special rate for sin and demerit goods.
Meeting in the Capital Thursday, state ministers who are part of the GoM said all members supported the “pro-people” proposal. Two specific concerns, however, stood out: whether there will be any institutional mechanism to compensate states for revenue loss; and whether the benefits from GST rate cuts will percolate to the ultimate beneficiary – the common person.
States said they do not oppose the “pro-people” proposal, but it may result in revenue losses that will ultimately leave them with less resources to spend on common people in their regions.
While Bihar’s Deputy Chief Minister and GoM convenor Samrat Choudhary spelt out the panel’s support for the GST overhaul proposal, he said observations made by states will be referred to the GST Council. Detailed discussions on items will be taken up in the Council, he said.
“We have deliberated upon the Centre’s proposal to remove the two GST slabs, we have given our support and recommendations. Now, the GST Council will decide. All states gave their views, there were some observations by some states. Those will be referred to the GST Council,” Choudhary said.
The differing views and observations of states on revenue loss and concerns over profiteering by manufacturers and companies will be part of the note that the GoM will send to the Council along with the Centre’s proposal.
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Some states were also of the view that the work done by the GoM over the last few years will now essentially be wasted as they would be simply handing over the Centre’s proposal to the GST Council.
“We have neither approved nor rejected it. Centre cannot give its proposal directly to the Council, so we will be just handing over the Centre’s proposal to the Council,” a top state government official told The Indian Express.
States are learnt to have sent their suggestions for the GoM’s note on a mechanism to compensate states that will address their revenue loss concerns. States are anticipating annual revenue loss of Rs 6,000-10,000 crore, the official said.
West Bengal’s Finance Minister Chandrima Bhattacharya echoed a similar view and said they are “okay with the pro-people proposal” but it is not an agreement. The Centre’s proposal has not outlined the figure for revenue loss on account of the GST rate rationalisation and the proposal should not move ahead without detailing a mechanism for compensating states for revenue loss.
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“It’s not an agreement in that way. If it’s there, it is okay. If it is pro-people, then it’s okay. But it has to be discussed in the Council’s meeting also. There is no benefit in discussing it item-by-item in the GoM meeting. It will be discussed item-by-item in the (GST) Council meeting. While presenting a report to the GST Council, they will give a note of what we have said,” she said.
Bhattacharya said no state had any issue in accepting the pro-people GST overhaul proposal. “All states are pro-people. There is no doubt about it. It’s nothing to talk about in politics. They are pro-people, let us take it for granted. But when the states lose their revenue, that also ultimately goes back to common people. That has to be looked into. That is what we have said,” she said.
“Because to give relief to common people should not mean that there isn’t much left to spend on them after that, we have to think about that. That’s why we have said that while you give the presentation, you must quantify it (revenue loss),” she said.
She also said that ministers from BJP-ruled states have concurred with the suggestions. “But we have said we are there, if it benefits people, we are okay. On the one hand it reaches people and on the other hand see what is the loss we (states) are facing. Ultimately if a state suffers any loss, that ultimately boils down to the suffering of the common man,” she said.
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Uttar Pradesh’s Finance Minister Suresh Kumar Khanna said the Centre’s proposal was welcomed by all member states saying it is in the interest of the common man.
“States were asking that they should be compensated for revenue loss. The revenue loss will be calculated. Ultra luxury goods and sin goods will attract 40 per cent,” he said.
Revenue loss concerns of states stem from the plan to prune the list of items in the 12 per cent slab and shift them to 5 per cent. There is also a concern that most items the existing 28 per cent slab. The Centre plans to introduce a special rate of 40 per cent, which will apply only to 5-7 sin, demerit and luxury items.
States revenue loss concerns stem from the plan to prune the list of items in the 12 per cent slab and shift them to 5 per cent. There is also a concern that most items in the existing 28 per cent slab will shift to 18 per cent slab except sin and demerit goods. The Centre plans to introduce a special rate of 40 per cent, which will apply only to 5-7 sin, demerit and luxury items.
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Some states have suggested amending the GST laws to allow for an additional levy going beyond the current cap of 40 per cent (20 per cent Central GST plus 20 per cent State GST). Some of the items right now attract GST of 60-70 per cent, Bhattacharya said, adding that the law should be amended to ensure that the current tax incidence, especially on sin goods, remains at the current level.
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