gst

The upcoming council meet is likely to remain focused on the matter of compensation payouts to the states. As the State governments face decreased cash flows due to ongoing COVID-19 lock down induced pause in the economic activity and continue to struggle with the burgeoning expenses, the demand is two-fold:

• Review the rates of GST compensation cess (herein after referred to as “cess”) to factor in inflation
• Evaluate the potential for borrowing by the Council to make accelerated payouts to the States. The States have flagged that the council can borrow cheaper than the states.

The council may look to rationalize the GST rates, cast the cess net wider or increase the rate of cess. Alternatively, it may recommend the states to step up the borrowings to be repaid through the future collections in the compensation cess fund. This alternative, however, is likely to meet a serious objection from the States.

The cess was introduced at the inception of GST in 2017, to compensate the manufacturing-heavy states, for the potential loss in revenue due to the allocation GST being based on destination of the consumer as opposed to the destination of the manufacturer under the previous regimes.

Under the existing rules, the cess will be levied for the first five years of the GST regime. The cess is applicable on certain notified goods in addition to the regular GST, as per the GST (Compensation to States) Act, 2017. The cess is also applicable on imports under Section 3 of the Customs Tarrif Act, 1975. Further, input tax credit is also available against the amount of cess paid by the assessees, however, such credit can only be utilized towards the payment of cess and not towards any other liability payable under the GST Act.

The cess collected by the Central Government is allocated to the manufacturing-heavy States by calculating the shortfall in the State’s revenue under GST versus the projected revenue. The projected revenue is calculated taking in to consideration, the State’s revenue for FY 2016-17 as the base revenue and assuming a growth rate of 14% per annum. The cess is provisionally calculated and released to the States every two months.

The challenge for Central Government is the gap between the cess collection versus the compensation payout to the States. The total cess collection and payment status currently stands as follows:

For FY 2020-21, as the cess collections have fallen due to the pandemic, the gap is expected to be much larger and hence has ignited a debate between the Center and the States. The legal challenge is also, that as per the law the cess is to be paid to the States through collection of the cess and not from the consolidated fund of India. This effectively means, that the shortfall in the cess collection has to be met from the future collections of cess and can not be funded through other budgetary measures.

At the end, it seems inevitable, that the tax payer will ultimately have to shoulder this burden as the gap funding solely from borrowings does not seem viable unless measures are put in place to ensure that future cess collection is sufficient to meet the future payouts as well as the current shortfall.

The Council will meet again on 19 September 2020, to take up the issues such as resolution of the inverted duty structure, tax rate on various items and additional measures for ease of doing business. The tax payer will thus, need to hold until 19 September 2020 to see what the council has in store for them in terms of measure and support for the business lost during the pandemic.