GST Reform: Opposition states demand 5-yr compensation for likely revenue loss

New Delhi, Aug 29 (PTI) Opposition-ruled states on Friday demanded that all states be compensated for 5 years for the likely Rs 2 lakh crore a year revenue loss due to the Centre's GST reform proposal.

Ministers from eight opposition-ruled states -- Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal -- also sought a mechanism to guard against profiteering by businesses post tax rate cut to ensure the benefits reach the common man.

The states suggested that an additional duty be levied on sin and luxury goods in addition to the proposed 40 per cent rate to maintain the current tax incidence. The proceeds from this levy should be distributed among states.

These states will present their proposals before the GST Council, chaired by the Union finance minister and comprising all state ministers, at the September 3 and 4 meeting.

The Centre has proposed that the GST be made a 2-tier tax structure of 5 and 18 per cent, as against the current 4-slab structure of 5, 12, 18 and 28 per cent, plus a compensation Cess.

According to the Centre's proposal, goods and services will be classified as merit and standard and taxed at 5 and 18 per cent. A 40 per cent slab has been proposed for select few items such as sin goods and ultra-luxury items. The Centre did not give an estimate of the revenue loss due to rate rationalisation.

Briefing reporters after a meeting of the eight states, Karnataka Finance Minister Krishna Byre Gowda said each state is expected to lose 15-20 per cent from its current Goods and Services Tax (GST) revenue and debunked the claim that tax revenue buoyancy will increase after the rate cut.

"The 20 per cent GST revenue loss will seriously destabilise the fiscal structure of state governments across the country," Byre Gowda said, adding that states should be compensated for 5 years which may be extended further till the revenues stabilise.

When GST was implemented, the revenue-neutral rate (RNR) was 14.4 per cent, but subsequent tax rate rationalisation has brought the net rate of taxation down to 11 per cent.

The current proposal by the Centre to reduce GST rates and prune slabs will bring down the net rate of taxation further to 10 per cent, Gowda said.

"It was mentioned at the time of introduction that GST will bring a buoyancy, meaning increased economic activity and that increased economic activity will result in increase in revenue. But the last 7-8 years of GST has proved the theory of buoyancy squarely wrong. Every round of rate reduction has resulted in net revenue loss of all states," Gowda said.

He further said "reasonable estimates" suggest the likely revenue loss from the proposed rate rationalisation at Rs 1.5-2 lakh crore. "71 per cent of this loss will be incurred by the states," Gowda said, adding that states' revenue interest should be protected.

"If there is a serious loss to state government revenues, people will be impacted, development work will be impacted and insufficient revenue will hurt state autonomy as well," Byre Gowda said.

With the proposed GST rate rationalisation, Telangana is estimated to lose Rs 7,000 crore annually, Telangana Deputy Chief Minister Bhatti Vikramarka told reporters and asked the Centre to properly compensate states for the losses expected from the new tax measure.

Himachal Pradesh Technical Education Minister Rajesh Dharmani said, "We agree to the proposal of rate rationalisation, but we should be compensated as well." There should be a separate slab for red-category manufacturing companies which adversely impact the environment, Dharmani added.

Kerala Finance Minister K N Balagopal said rate rationalisation should happen but states' revenue will have to be protected and the benefits should go to the common man.

Punjab Finance Minister Harpal Singh Cheema also demanded that a mechanism be set up to detect profiteering so that the benefits of rate rationalisation reach the common man.

"Since the GST rollout in 2017, tax rates have been rejigged 15 times, but all states are facing revenue loss," Cheema said.

Tamil Nadu Finance Minister Thangam Thennarasu Said that the compensation should be given to all the states for likely losses due to rationalisation exercise. States revenue interest has to be protected.

The eight states, which will meet again on September 2, demanded that the base year for calculating revenue protection be fixed as 2024-25 and states' revenues be protected at 14 per cent annually, which is the average growth rate of the preceding 3 years.

"Should there be a deficit even after the imposition of the proposed additional levy (on sin and luxury goods), the union government should raise loans secured against the future receipts of the additional levy," said the proposal by the states. PTI JD DRR