GST: No clarity on the size of state compensation package


While GST Council has approved the bill compensating the states due to loss of revenue after the implementation of the Goods and Services Tax (GST), there is fair amount of suspense on the size of the overall compensation package.

The only estimate of the compensation package that we know about is Rs 55,000 crore that the West Bengal finance minister Amit Mitra, who is also the chairman of the Empowered Committee of Ministers on GST, had mentioned in some of his media interactions.

 However, experts say they are not sure on what basis this figure has been arrived at. People were expecting the budget estimates of revenue deficit figures may throw some light into the kind of compensation figure that the Centre is expecting. The budget, though, remains silent on the issue.

MS Mani, senior director, Indirect Tax, Deloitte India, says that the government has not yet put out an official estimate of the size of compensation package. “The government might have an estimate but it wants to keep it a secret for now,” says Mani.

One of the reasons why it is difficult for the government to come out with an official estimate is the fact that it has not yet decided which product would be taxed at what rate. All we know now is that there would be four rates, 5 per cent, 12 per cent, 18 per cent and 28 per cent, but the GST Council is yet to decide which products and services would be taxed at what rate.

Even before the Budget, there were speculation as to how the government might make its indirect tax collection estimate. But the budget estimates do not look very different and it might have simply made the estimates based on the existing indirect tax laws.

According to the compensation bill, the states will be given full compensation for the first five years for any shortfall in revenue due to implementation of GST. The compensation would be calculated based on the revenue of 2015-16 assuming a 14 per cent revenue growth in the subsequent five years.

The base year revenue for a state would be the sum of the revenue collected by the State and local bodies from the Value Added Tax (VAT), sales tax, purchase tax, Central Sales Tax (CST), entry tax, octroi, local body tax, etc.

The government also faces the challenge of funding this compensation package, given it has not much headroom on the fiscal deficit front. It is therefore likely to fund the compensation through cesses levied on goods and services in the highest tax bracket of 28 per cent. According to experts, four products may fall under this category-luxury cars, aerated beverages, cigarette and ‘pan masala’.

“A challenge now to the Centre would be raise funds in order to compensate States, which in a way could be met through levy of cess on luxury items and demerit goods, including clean energy cess,” says Nishit Dhruva, Managing Partner, at law firm MDP & Partners.


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