As the Goods and Services Tax (GST) regime nears five years from completion and ushers in the compensation regime for states to fill the income gap, measures to raising revenue, such as rate rationalization, review of exemptions, and system reforms, will help. will be the key sticking points between the states and the Center as they converge for the June 28-29 GST Council meeting.
With a high rate of inflation, any major modification of the tax blocks will not be favored in the short term; instead, the Council is likely to rely heavily on a number of other measures to boost revenue: correcting the reverse tax structure for items such as LED lamps, printing/drawing ink, knives, spoons, electric pumps, solar water heater, finished composite leather works, and removal of the exemption for items such as pre-packaged and labeled foods such as wheat flour, puffed rice, curd/lassi/buttermilk, paneer, and refrigerated meat/fish.
States, especially those governed by the opposition, are expected to increase the demand for extension of the compensation regime to overcome the revenue shortfall beyond June 2022.
Under the GST, as a percentage of the Goods and Services Tax (Compensation to States) Act 2017, states were guaranteed compensation at a compound rate of 14 percent from the 2015-16 base year for losses that arose due to the implementation.
Last week, the Ministry of Finance notified the extension of the levy and the collection of the compensation cessation until March 2026, in line with an earlier approval granted by the GST Council last year for the repayment of loans intended to compensate states. for the five-year period from July 2017 implementation and not for any extension of compensation to states beyond June 2022.
“GST has been a good idea but poorly implemented. Micro-level management in the implementation did not happen. Therefore, the states are in a very bad position. The extension of the compensation scheme should happen,” Delhi Finance Minister Manish Sisodia told The Indian Express.
“The Center is not asked to pay with its resources. Compensation funds were supposed to come from tax collections. Until the effective implementation of GST occurs, as envisioned, the compensation regime must continue. The states gave up most of their fiscal rights, VAT was one of the most important components for them. Growth of 14 percent was promised, which is not being achieved and is coming to an end. This is not done,” he added.
The council is also expected to discuss interim recommendations from a ministerial panel on rate rationalization, including imposing a 12 percent tax on hotel rooms costing less than Rs 1,000 per day that are currently exempt, increasing the fee on leather goods, clay brick manufacturing services from 5% to 12%, increase GST on LED lamps, ink, knives, blades, electric pumps, spoons, forks, dairy machinery from 12% to 18% and bring pre-packaged foods including rice, atta, cottage cheese, lassi, puffed rice on par with brand name foods with a 5 percent tax rate. In addition, he will discuss the Adjustment Committee’s proposal to levy taxes on margins made by tour operators at an appropriate rate along with a suggestion to make electronic guidance compulsory for the movement of gold within the state above a threshold of Rs 2 lakh
The way to follow
More enforcement measures to plug revenue leaks are in the offing with increased scrutiny to be placed on high-risk taxpayers. At the time of registration, measures such as better verification through the use of mandatory biometric authentication for high-risk taxpayers, inclusion of data from electricity bills, real-time validation of all bank accounts against a PAN in particular and geotagging have been suggested by a panel minister.
“Broadening the base is the only option, rates cannot be raised. Compliance needs to be increased using technology to identify revenue leaks, false returns, that are not currently trapped in the system,” said Sisodia, who was a member of the Government of Mexico on system reforms.
Identify the risky behavior of new registrants/applicants using artificial intelligence and place the information in the back office for the field officer to carry out the mandatory physical verification of these taxpayers along with real-time validation of bank accounts to through the integration of the GST system with NPCI and inclusion of the metadata of the electricity bill (CA No.) as a data field during the registration of new taxpayers are some of the measures that will be discussed at the Council meeting.
In 2021-22, only five of the 31 states/UTs (Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim) saw revenue growth above the protected income rate for GST states. Puducherry, Punjab, Uttarakhand, Himachal Pradesh and Chhattisgarh had the highest income gap between protected income and gross post-agreement state GST income in 2021-22.