The recent 40th Goods and Services Tax (GST) Council meeting brought forth significant points of discussion. In this article, we outline the critical outcomes.
Current Status of GST Collections
In the initial two months of the 2020-2021 financial year, combined GST revenues of the state and Centre amounted to only 45% of the projected monthly target. This year’s target for collective monthly GST revenue is estimated at Rs. 1.21 lakh crore, considering both the budget estimate and states’ protected revenue.
Falling Revenues Call for Market Borrowing
As revenue has dwindled for both the state and the Centre, the GST Council plans a single agenda meeting in July 2020. The council will discuss potential market borrowing as a method to fundraise and compensate states for lost GST revenue. The GST Act 2017 guarantees states a compensation for any loss in revenues over the first five years of GST implementation (2017-2022), through a cess that contributes to the Compensation Fund.
Legality of GST Council Borrowing
There are questions regarding the legal capacity of the GST Council to borrow, such as whether it can attain sovereign status like Centre and states. The impacts and implications of market borrowing on the Fiscal Responsibility and Budget Management Act (FRBM Act) remain unclear.
Considering Tax Rationalisation
The Council deliberated on rectifying the inverted duty structure for footwear, fertilisers, and textiles. In this context, an inverted duty structure indicates a scenario where tax on input materials exceeds the tax rate on the finished goods. A decision was deferred due to resulting price increases for fertiliser, footwear, and ready-made garments, which could impede economic recovery.
Compliance-related Relief
The GST Council extended compliance-related relief to small taxpayers with a turnover of up to Rs. 5 crore. The council halved the interest on delayed filing of GST returns for February, March and April 2020 to 9%, provided the returns are filed by September 2020. For May-July 2020, the deadline for filing GST returns has been extended to 30 September 2020 without a penalty.
About the GST Council
The GST Council, a constitutional body under article 279A, provides recommendations to Union and State governments on issues related to Goods and Service Tax. The Constitution (One Hundred and First Amendment) Act, 2016 introduced this council, chaired by the Union Finance Minister. Other members include the Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation from all states. This council upholds a federal body’s principles where both the Centre and states have representation.
A Critical Turning Point
The urgent need now is to determine whether the GST Council can be granted sovereign status, thereby facilitating borrowing from the market to meet the states’ compensation requirements. If given the authority to borrow, it must be clarified who will bear the debt load. These decisions could significantly impact India’s economic health in light of falling revenues and the ongoing global downturn.