Opposition states demand compensation for revenue loss due to Centre's GST reform proposal

New Delhi: Opposition-ruled states on Friday said the Centre's proposal for GST rate rejig could result in a revenue loss of about Rs 1.5 crore to Rs 2 lakh crore and demanded compensation for the losses incurred by them.

Finance ministers from eight states -- Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal -- decided to present their proposal to the GST Council at the next meeting on September 3 and 4.

Their proposal for balancing rate rationalisation and revenue neutrality suggests levying an additional duty on sin and luxury goods in addition to the proposed 40 per cent rate to maintain the current tax incidence.

The proceeds from this levy should be distributed among states, the opposition-ruled states demanded.

Briefing reporters after a meeting of the eight states, Karnataka Finance Minister Krishna Byre Gowda said each state is expected to lose 15-20 per cent from its current Goods and Services Tax (GST) revenue.

"The 20 per cent GST revenue loss will seriously destabilise the fiscal structure of state governments across the country," Byre Gowda said, adding that states should be compensated for 5 years till the revenues stabilise.

He said when GST was implemented, the revenue-neutral rate (RNR) was 14.4 per cent. Following the subsequent tax rate rationalisation, the net rate of taxation decreased to 11 per cent.

The current proposal by the Centre to reduce GST rates and prune slabs will bring down the net rate of taxation to 10 per cent.

"States' revenue interest should be protected. If there is a serious loss to state government revenues, people will be impacted, development work will be impacted and insufficient revenue will hurt state autonomy as well," Byre Gowda said.

The Centre has proposed that the GST be made a 2-tier tax structure of 5 and 18 per cent, as against the current 4-slab structure of 5, 12, 18 and 28 per cent, plus a compensation Cess.

As per the Centre's proposal, goods and services will be classified as merit and standard and taxed at 5 and 18 per cent. A 40 per cent slab has been proposed for select few items such as sin goods and ultra-luxury items.

Himachal Pradesh Technical Education Minister Rajesh Dharmani said, "We agree to the proposal of rate rationalisation, but we should be compensated as well." Punjab Finance Minister Harpal Singh Cheema also demanded that a mechanism to be set up to detect profiteering so that the benefits of rate rationalisation reach the common man.

The eight states demanded that the base year for calculating revenue protection be fixed as 2024-25.

"Should there be a deficit even after the imposition of the proposed additional levy (on sin and luxury goods), the union government should raise loans secured against the future receipts of the additional levy," said the proposal by the states.