The shadow of the Gujarat assembly election later this year and high inflation will loom over the two-day meeting of the Goods and Services Tax (GST) Council starting on Tuesday, and force it to defer a plan to raise GST on items of mass consumption, three people familiar with the matter said on condition of anonymity.
The people added that the council could decide to remove certain tax exemptions, reduce compliance burden, establish an institutional mechanism for dispute resolution, and impose higher duties on online gaming.
States, especially those ruled by non-NDA (National Democratic Alliance) parties are expected to push for extending the compensation period for another three to five years, they said. The compensation period, with an assured 14% annual growth in revenue, ends June 30.
The 47th Council meeting, which is being held in Chandigarh on Tuesday and Wednesday, may also consider elaborate, item-wise tax rate rationalisation proposals to correct inverted duty structure and remove imprudent tax exemptions, they added.
“While rates could be increased for certain items such as online gaming etc, it is unlikely that GST on items of mass consumption would be raised immediately due to political and economic reasons,” one of the three, who is associated with the rate rationalisation exercise, said. The council is expected to impose 28% GST on online gaming at par with services such as casinos, race-course, and gambling.
Experts said the council may avoid any major rate hike that would have an adverse impact on the economy. “A major rate rationalisation exercise could lead to inflationary pressures as the process would entail increasing the rates on certain products. Since inflation control is one of the key priorities at present, we could see the rate rationalisation exercise deferred to a later period when inflation has cooled down,” said MS Mani, partner at Deloitte India.
India’s retail inflation surged to a 95-month high of 7.8% in April, cooled to 7.04% in May, but is still well above the Reserve Bank of India’s (RBI’s) official upper tolerance level of 6%.
Any attempt to change rates will also have political implications in the crucial assembly elections of Gujarat, which is scheduled for December, the second person said. “Such political considerations cannot be ignored. Recently, an emergency session of the council was convened for only one agenda item on behest of Gujarat and the decision to raise taxes on textiles was postponed.”
The 46th meeting of the council was convened on December 31, 202,1 under the “emergency provisions” of the law, after Gujarat proposed deferring a September decision by the council to move certain textile items to a higher tax slab, a move originally meant to correct inverted duty structure.
The third person said the two-day meeting will, however, take several key decisions to ease compliance, reduce exemptions, and set up long-pending GST tribunals for expeditious resolution of disputes. “There is no point in extending GST exemptions to regulators and financial institutions. Anyway, these taxes will be paid by businesses dealing with these institutions and they can always claim it through input tax credit,” the person said.
The council may announce the creation of a Goods and Service Tax Appellate Tribunal (GSTAT) for expeditious resolution of indirect tax litigations—a move that means taxpayers will no longer be forced to appeal in high courts, which is expensive and a time consuming process, the person said.
HT on February 5, quoting revenue secretary Tarun Bajaj, reported that the Union finance ministry planned to raise this matter in the GST Council.
The third person added the meeting, which is being held days ahead of expiration of the five-year compensation period, may see a lengthy discussion on this matter, particularly on the demand of states such as Delhi, Punjab, Kerala, and West Bengal.
Speaking to CNBC-TV18 on Monday, Delhi’s deputy chief minister Manish Sisodia said the extension of compensation is one of the key issues for states, and the Union government should extend it beyond June 30.
Several states have urged Union finance minister Nirmala Sitharaman to extend the compensation period for another three to five years because of severe devastation caused to their economies by the Covid-19 pandemic and supply chain disruptions due to the Ukraine war, the third person said.
The GST law assured states a 14% rise in their annual revenue for five years from July 1, 2017, and guaranteed that any shortfall would be made good through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, other tobacco products, aerated water, automobiles, and coal.
While the legally binding five-year period of compensation ends on June 30, the Union government on June 24 notified that the compensation cess on sin goods and luxury items will continue till March 31, 2026, with the amount thus raised being exclusively used to retire debt ( ₹2.69 lakh crore) raised from the market to compensate states during the pandemic period—2020-21 and 2021-22.
Commenting on the June 24 notification, Abhishek Jain, Partner-Indirect Tax at KPMG in India, said: “To implement the decision of the GST Council, these Rules have been issued to extend the levy of the Compensation Cess till March 2026 to cover the shortfall earlier. The issue whether the states would be compensated beyond five years or not may get decided in the upcoming meeting