First physical GST Council meeting since pandemic begins in Lucknow

Finance minister Nirmala Sitharaman will chair the first physical Goods and Service Tax (GST) Council meeting in Lucknow today, where a host of issues including inclusion of petroleum products into the tax ambit and compensation to states beyond 2022 is likely to be discussed.
Inclusion of petroleum products, petrol and diesel within GST is set to be a hot topic of debate as high taxes and cess have pushed fuel prices to record highs. The clamour for reduction of levies has been rising to provide some relief to consumers paying more than Rs 100 per litre for petrol.

However, Rajya Sabha MP and former deputy finance minister of Bihar Sushil Modi said that such a move would lead to large revenue losses for both Centre and states, backing the need to defer discussion on the issue at the Council meeting.

"If petrol and diesel are brought under the purview of GST, then the tax on these items would have to be reduced from 75% to 28%. This will deprive Centre and state governments of revenue of Rs 4.10 lakh crore - Rs 3 lakh crore from petrol and Rs 1.1 lakh crore from diesel," he said in a Twitter post ahead of the meeting.

He cautioned that during the Covid 19 pandemic period, the government would not be able to compensate such a huge amount and it will impact development work and India's massive vaccination drive being funded by the government.

The issue of extending the compensation to states beyond 2022 under the GST regime is also likely to be a topic of debate, with states seeking extension by atleast five years, at 14% growth rate of revenue.

"States have been promised compensation of shortfall at the protected growth rate of 14%, and it should not be lowered than that level," said Chhattisgarh commercial tax minister TS Singh Deo.

The GST compensation is calculated as per the formula provided in the Compensation Act and is released on a bi-monthly basis. However, due to the pandemic, states’ revenues and amounts coming from compensation cess have taken a hit, while compensation due from the Centre has increased. GST compensation of Rs 1.13 lakh crore has been released to states to partly meet the compensation payable since April 2020.

The Centre borrowed Rs 1.1 lakh crore in 2020-21 and gave to states as back-to-back loans to meet the shortfall. The council decided to borrow another 1.59 lakh crore for 2021-22 – of which Rs 75,000 crore has been issued – and extended the period of levying cess which will help in repayment of the loan.

The Centre is set to present options to states on the back of revival in GST collections from July onwards, which has indicated that for the current year monthly revenues are expected to improve.

The government is of the view that revenue collection along with back-to-back assistance of Rs 1.59 lakh crore will be adequate to cover the revenue shortfall gap and partially compensate for 2020-21 arrears, after taking into account Rs 1 lakh crore that will be paid to states as compensation cess.

The Council is also expected to take up rate rationalisation of a number of products, besides extending the concessional tax rates for Covid related relief materials, especially medicines and drugs till December 31, besides reducing rates on eight more medicines from 12% to 5%.

The fitment committee has recommended that the GST concession on Amphotericin B, tocilizumab, remdesivir and anticoagulants like heparin should continue till December 31, instead of September 30. The GST Council had exempted Amphotericin B and tocilizumab from GST and reduced the rate on remdesivir and anti-coagulants to 5% from 12% in June.

The committee has also recommended lowering GST to 5% from 12% till December 31, on itolizumab, posaconazole, infliximab, bamlanivimab, etesevimab, casirivimab, imdevimab, 2-Deoxy-D-Glucose and favipiravir drugs.

"In addition to extending relief for pharma products required for treatment of Covid patients," said M.S Mani, Senior Director, Deloitte India. It is essential to overcome the challenges arising from the inverted duty structure on certain products, he added.

Rate increase on solar PV modules to 12% from 5% may also be taken up, to correct inverted duty structure.

Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co said, "Issues such as capacity based taxation for tobacco products, future of compensation levy, GST rate rationalizations are expected to be discussed in the meeting. It will also be interesting to see if the GST council extends the GST exemptions for essential COVID supplies for a further period."

On the agenda are issues such as allowing the tenure of the National Anti-profiteering Authority to expire by November end and shifting of all profiteering cases to the Competition Commission of India. Covid cess on pharma for intra-state supplies in Sikkim, GST on food delivery apps at par with restaurants and composition scheme for brick kilns at 6% without input tax credit.