BENGALURU: The cash starved Karnataka government sighed with relief on Thursday after it was, more or less, assured of over Rs 30,000 crore GST compensation under a new formula suggested by the Centre.
At the 41st meeting of GST Council in Delhi, Union finance minister Nirmala Sitharaman discussed the modalities of disbursing GST compensation to states, presenting two options. Under this formula, Karnataka can either borrow Rs 13,764 crore, which is the compensation shortfall of the pandemic months, or its entire yearly share of Rs 30,764 crore through the Reserve Bank of India (RBI).
Karnataka is widely expected to pick the second, larger option. It can seek a loan from the RBI at a reasonable interest rate in lieu of the GST payout sum. A compensation cess is currently levied on select goods and this money will be used to repay the loan. The Centre has established a fund pool through the cess. Earlier, the cess was supposed to end in 2022, but it will now be extended to 2025 or 2026.
“Karnataka is among the most efficient states in terms of tax collection. We have achieved 71 per cent of the target even during the time of distress [Covid-19 crisis]. We argued before the Centre that the state should not be punished, if it can’t be rewarded for its efforts. We are happy that we are going to get our full dues,” said home minister Basavaraj Bommai, who attended the GST Council meeting virtually on Thursday. The central government will send proposals in a couple of days and states must respond within a week. Bommai said whether to borrow the six-month compensation amount or the entire share of the 2020-21 fiscal would be discussed with chief minister BS Yediyurappa, who holds the finance portfolio. Officials in the finance department said Karnataka was most likely to choose full compensation.
Under the Central Goods and Services Tax Act, states are guaranteed payments for any loss of revenue in the first five years of GST implementation from July 1, 2017. The shortfall is calculated assuming 14 per cent annual growth in GST collections by states over the base year of 2015-16. After the coronavirus outbreak, compensation cess collections have plunged. States insist that the Centre is still obligated to pay the compensation As the Centre is also suffering revenue losses because of the pandemic, it has suggested the option of raising money through the RBI.
The cumulative revenue loss suffered by states is so huge that the Centre has released Rs 1.6 lakh crore as GST compensation for 2019-20 as against cess collections of Rs 95,444 crore.
Extension of the cess will finally hurt consumers, said some experts. “The compensation cess on goods like cars and pan masala ranges from 17 per cent to a staggering 204 per cent. Twenty-two such goods are listed as luxury commodities. Finally, it’s the consumer who must swallow the bitter pill, while the Centre and states are being bailed out,” said BT Manohar, a member of the Karnataka GST advisory council.
At the 41st meeting of GST Council in Delhi, Union finance minister Nirmala Sitharaman discussed the modalities of disbursing GST compensation to states, presenting two options. Under this formula, Karnataka can either borrow Rs 13,764 crore, which is the compensation shortfall of the pandemic months, or its entire yearly share of Rs 30,764 crore through the Reserve Bank of India (RBI).
Karnataka is widely expected to pick the second, larger option. It can seek a loan from the RBI at a reasonable interest rate in lieu of the GST payout sum. A compensation cess is currently levied on select goods and this money will be used to repay the loan. The Centre has established a fund pool through the cess. Earlier, the cess was supposed to end in 2022, but it will now be extended to 2025 or 2026.
“Karnataka is among the most efficient states in terms of tax collection. We have achieved 71 per cent of the target even during the time of distress [Covid-19 crisis]. We argued before the Centre that the state should not be punished, if it can’t be rewarded for its efforts. We are happy that we are going to get our full dues,” said home minister Basavaraj Bommai, who attended the GST Council meeting virtually on Thursday. The central government will send proposals in a couple of days and states must respond within a week. Bommai said whether to borrow the six-month compensation amount or the entire share of the 2020-21 fiscal would be discussed with chief minister BS Yediyurappa, who holds the finance portfolio. Officials in the finance department said Karnataka was most likely to choose full compensation.
Under the Central Goods and Services Tax Act, states are guaranteed payments for any loss of revenue in the first five years of GST implementation from July 1, 2017. The shortfall is calculated assuming 14 per cent annual growth in GST collections by states over the base year of 2015-16. After the coronavirus outbreak, compensation cess collections have plunged. States insist that the Centre is still obligated to pay the compensation As the Centre is also suffering revenue losses because of the pandemic, it has suggested the option of raising money through the RBI.
The cumulative revenue loss suffered by states is so huge that the Centre has released Rs 1.6 lakh crore as GST compensation for 2019-20 as against cess collections of Rs 95,444 crore.
Extension of the cess will finally hurt consumers, said some experts. “The compensation cess on goods like cars and pan masala ranges from 17 per cent to a staggering 204 per cent. Twenty-two such goods are listed as luxury commodities. Finally, it’s the consumer who must swallow the bitter pill, while the Centre and states are being bailed out,” said BT Manohar, a member of the Karnataka GST advisory council.
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