‘States should be compensated for the revenue loss for at least five years or beyond till the revenue stabilises.’

Illustration: Dominic Xavier/Rediff

Eight Opposition-ruled states — Karnataka, Jharkhand, Punjab, West Bengal, Tamil Nadu, Kerala, Telangana and Himachal Pradesh — on Friday suggested additional levy over and above the proposed 40 per cent on sin and luxury goods.

This, they said, would compensate states for the likely revenue loss arising from goods and services tax (GST) rate rationalisation for at least five years or beyond till the earnings stabilise.

At a consultative meeting in the capital, ahead of the GST Council’s meeting on September 3-4, these states supported the Centre’s proposal for rationalisation.

However, they stressed that the benefits of lower rates should be passed on to the common man.

“This additional levy is not a rate increase but the replacement of cess imposed earlier. This additional levy will be a gap between 40 per cent and current prevailing rate. We have proposed no rate increase except for one or two commodities of sin good nature,” said Karnataka Finance Minister Krishna Byre Gowda while briefing the media.

The states proposed that the proceeds from this additional levy must be fully transferred to them.

They suggested that the base year for compensation should be 2024-2025 and protection should be granted at 14 per cent per annum.

This is the average of the growth rates of the preceding three financial years.

Meanwhile, these states also stressed that there is no clarity in the Centre’s proposal on the mechanism to retain the effective tax incidence on sin and luxury goods.

For example, pan masala presently bears an effective incidence of nearly 88 per cent. A reduction of 40 per cent would create a substantial shortfall of 48 per cent.

Gowda mentioned that the states rely on GST for 50 per cent of their revenues and the likely loss to states due to rationalisation would be in the range of 15 to 20 per cent.

“GST contributes about 28 per cent of the Centre’s gross tax revenue. This implies that the central government gets 72 per cent of its revenue from other sources like direct taxes, income tax, dividends from various public institutions and cesses,” Gowda explained.

“The Centre gets close to 17 to 18 per cent of its revenue from various cesses and not a single penny of this is shared with the states,” he said.

“States rely on GST for 50 per cent of their revenues. So, on a 50 per cent base, if a state government loses 20 per cent, then it is going to seriously destabilise the fiscal structure of the states.

“States should be compensated for the revenue loss for at least five years or beyond till the revenue stabilises,” Gowda added.

Gowda said the Centre hasn’t officially shared any estimate of revenue loss likely to arise from this rate rationalisation exercise.

Various institutions and experts have estimated that the revenue loss from this rate rationalisation will be about Rs 850 billion, going up to Rs 2.5 trillion, he said.

“Some friends point out that if the states are going to lose then the Centre may also lose.

“Without getting into the details, I would like to point out that 71 per cent of this loss will be incurred by states,” Gowda added.

“Every round of rate reduction has resulted in net revenue loss to all the states. So, the theory of buoyancy has been conclusively proven wrong by actual experience.

“Even after 7-8 years of GST, the revenues have not even reached the level that prevailed in 2016,” said Gowda.

Rajesh Dharmani, technical education minister, Himachal Pradesh, highlighted the need for additional slabs for red category manufacturing industries that adversely impact the environment.

Key demands

• Proceeds from additional levy must be fully transferred to the states
• Benefits of lower rates should be passed on to common people
• Base year for compensation should be 2024-2025
• States said there’s no clarity in the Centre’s proposal on the mechanism to retain the effective tax incidence on sin and luxury goods

Feature Presentation: Ashish Narsale/Rediff