GST Council meet: Extension of compensation cess to be in focus

New Delhi, April 29: The much-awaited 47th Goods and Services Tax (GST) Council meeting, with its focus on GST rate restructuring and extension of GST compensation cess, will now possibly be held in the first week of May, once the Union Finance Minister Nirmala Sitharaman returns from her 10-day visit to the US after attending the World Bank-IMF meeting earlier this month.

Among the many items on the Council's agenda, the extension of the GST compensation cess to states could turn out to be a contentious issue if the government refuses to accede to the request, given its vociferous demand from several opposition-rules states.

The states have urged the Centre to extend the five-year compensation period under the GST law before its termination by June-end. Any move to extend the GST compensation deadline, however, will call for an amendment to the Indian Constitution, which will have to be taken up in the next parliamentary session because the Constitution's 101st amendment, states can only be compensated for five years, starting 2017.

Any denial of such a request would seriously hurt the revenues of states, which could force them to levy special cess on items which fall outside the purview of the GST Council, like the imposition of Covid Cess by the states of Jharkhand and Kerala. Under the existing law, states are given full compensation for the first five years of the introduction of GST on the assumed revenue growth rate of 14 per cent from the base year of 2015-16. Compensation cess is levied on luxury and sin items such as aerated drinks, coal, pan masala, cigarettes and automobiles over the peak rate of 28 per cent.

Reports also suggest that the GST Council is also contemplating the simplification of the tax regime by rationalising tax rates, and correcting the inverted duty structure, where the duty on final products is much lower than those of raw materials and intermediaries needed to manufacture the product.

"This could mean that the Council may decide to revise tax rates and may also review the exemption list. Thus, the industry can expect rate revisions, pruning of exemption list and increase of tax rates in respect of goods which are presently under inverted duty structure," says Charanya Lakshmikumaran, Partner, Lakshmikumaran & Sridharan Attorneys.

However, if the Council decides to discontinue with GST compensation cess, it will be a major relief for the industry which is paying compensation cess over and above the GST.

Merger of tax slabs of 12 per cent and 18 per cent into a single slab, may result in reduction of classification-related disputes.

"However, if the single slab is towards the higher side, the move will put a higher tax burden on the end consumers who are the ultimate bearers of tax burden," adds Lakshmikumaran.

Further, the industries whose effective tax rate is reduced will be required to pass on the relief to end consumers in compliance with the anti-profiteering provisions. There are also reports that the government may discuss the inclusion of aviation turbine fuel (ATF) under the GST regime because of the current high crude prices.

Experts like Lakshmikumaran agree that while no straightjacket formula can be prescribed to help industry in deciding the tax classification and other relevant issues, the Council should focus on administrative changes, which can be introduced in the areas of assessment under GST, advance ruling mechanism, constitution of tribunals, etc. which shall ensure timely disposal of issues and will also provide certainty to the industry.

The GST rate structure currently contains four important GST rate slabs -- 5 per cent, 12 per cent, 18 per cent and 28 per cent.

Many economists and industry experts feel that it is necessary to merge a few slabs to arrive at revenue-neutral rates. For this purpose, the GST Council previously deployed a committee or team of GST Council members under the leadership of Karnataka Chief Minister Basavaraj Bommai to study the GST rate rejig need issues and resolutions.

The committee has had several meetings in the past and its leader had met the Sitharaman to discuss the progress made in the GST rate rejig study.