States’ GST gap narrows, weakening case for cessation

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Goods and Services Tax (GST) collections have increased in all states, reducing their shortfall and eroding their case for maintaining compensation.

When states fall short of their GST collection target, the Center is required to make up the difference, a five-year obligation that began in 2017 and ends June 30. The high deficit of previous years had prompted several states to lobby for the retention of the tax; however, data from the GST Council showed that the shortfall as a share of total state protected revenue narrowed significantly in FY22 as tax filings increased and collections taxes have skyrocketed.

The trend is observed for all states in FY22 and, on average, the gap as a share of revenue protected fell from 38% in FY21 to 27% in FY22. of FY22, according to the data.

In addition, the share of assessees eligible to file monthly transaction tax returns in GSTR-3B form on which taxes are paid has steadily improved. In April 2022, 78% of all people eligible for monthly filing filed tax returns, up from 73% last November, the data shows.

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The latest data, which reinforces the Centre’s position that states may not need GST compensation beyond June 30, comes ahead of the GST Board meeting at the end of this month, just before the expiration of the compensation plan. States like Punjab, Kerala and West Bengal have demanded an extension of the compensation period. The physical meeting of the Council is expected to be dominated by discussions of states’ budget difficulties, several rule changes intended to improve the efficiency of the tax system and some corrections to tax rates.

An email sent Thursday to the Department of Finance and the GST Council seeking comment on the story went unanswered as of press time.

Some states, however, face overall fiscal strains. According to a study by the Reserve Bank of India, Bihar, Kerala, Punjab, Rajasthan and West Bengal are the five most stressed states in terms of debt to state gross domestic product ratio.

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Higher GST revenues for states certainly indicate increased tax compliance, said Rajat Mohan, senior partner at AMRG & Associates, an accounting firm. “One of the contributing factors to this is the nationwide enforcement actions taken by GST authorities. to pay in order to avoid litigation,” Mohan said.

Despite the resource needs of the Center and the States, a drastic increase in the GST rate is not on the agenda of the GST Board, due to the surge in inflation. In a presentation to Council at its last major meeting in September, the Center suggested a series of measures to increase revenue, including increasing the GST rate on gold from 3% to 5%, increasing of the coal tax, the 5% increase in the GST slab and the elimination of exemptions. According to the presentation, a one percentage point increase in the 5% GST rate will result in an additional increase 50,000 crores. Top 5% items include sugar, fertilizer, cotton, cotton yarn, electric vehicles, edible oil and branded cereals.

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However, the jury is still out on these issues as the Ministerial Group on Streamlining GST Rates led by Karnataka Chief Minister Basavaraj Bommai has postponed making recommendations on major revisions for now. rates.

However, the Council is likely to consider measures to correct tax anomalies and reduce exemptions. The Centre’s presentation last year pointed out that exemptions needed to be streamlined on items such as animal feed, wool, rental of houses to corporations and some education and health services. It had also recommended a correction of reverse duty on a host of items, including renewable energy equipment, wire, utensils, pens, water pumps, bicycles, LED lights, tractors, medical equipment, agarbatti and electric vehicles.

Refunds under the reverse fee structure result in an outflow of 30,000 crore per year.

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