With the Centre’s proposed two-slab indirect tax structure in the next-gen GST reforms, Opposition-ruled states on Friday demanded that all states need to be compensated for 5 years for the likely Rs 2 lakh crore a year revenue loss due to the government’s move. The states also 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,” they said.
With the Centre’s plan for 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, the government, however, is clueless about the estimate of the revenue loss due to rate rationalisation. As per the 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.
Ministers from eight opposition-ruled states such as 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. These states will present their proposals before the GST Council, chaired by the Union finance minister Nirmala Sitharaman and comprising all state ministers, at the September 3 and 4 meeting.
Briefing reporters after a meeting of the eight states, Karnataka finance minister Krishna Byre Gowda said that each state is expected to lose 15-20 per cent from its current 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. “However, the proposal by the Centre to reduce GST rates and prune slabs will bring down the net rate of taxation further to 10 per cent. It was mentioned at the time of introduction that GST will bring 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.
“Reasonable estimates suggest that the likely revenue loss from the proposed rate rationalisation at Rs 1.5-2 lakh crore. A 71 percent of this loss will be incurred by the states and 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,” Gowda added.
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.
Kerala finance minister K N Balagopal also said rate rationalisation should happen but states’ revenue will have to be protected and the benefits should go to the common man, while Himachal Pradesh technical education minister Rajesh Dharmani said that they agreed to the proposal of rate rationalisation, but they should be compensated as well. Besides, Tamil Nadu finance minister Thangam Thennarasu also said that the compensation should be given to all the states for likely losses due to rationalisation exercise and states revenue interest has to be protected.
