NEW DELHI: Amid concerns about the revenue impact of the Centre’s pro-middle-class ‘Next Gen GST’ with a proposed two-slab structure, government sources clarified that the Centre is an equal partner in revenue sharing with the states and that its proposal anticipates a revenue boost over time, driven by increased consumption.
Under the current Goods and Services Tax (GST) framework, revenues are shared equally between the Centre and the states. Additionally, 41 per cent of the Centre’s share of the divisible tax pool is allocated to states as per the Finance Commission’s recommendations.
“Centre has equal concerns over what is being collected and what will be collected in GST. As members of the GST Council, both are equal partners. In such a setup, is it fair to expect that the Government of India will sit as a donor to compensate states?” a government source said.
Currently, Goods and Services Tax (GST) is a 4-tier structure with tax rates at 5 per cent, 12 per cent, 18 per cent and 28 per cent. Food and essential items are either taxed at nil or 5 per cent rate, and luxury and sin items are at 28 per cent.
The 5 per cent slab accounts for 7 per cent of total GST revenues, while the 18 per cent slab accounts for 65 per cent. The 12 and 28 per cent slabs give 5 and 11 per cent share, respectively, in the GST kitty.
The Centre has proposed to the Group of Ministers on GST rate rationalisation a 2-tier rate structure of 5 per cent and 18 per cent for ‘merit’ and ‘standard’ goods and services, and a 40 per cent rate for about 5-7 goods. The proposal entails doing away with the current 12 and 28 per cent tax slabs.
Currently, states have exclusive taxation rights over land and petroleum products. Also, the Centre, under a special assistance scheme, is giving a 50-year interest-free loan for capital expenditure to states.
Besides, the health and education cess and other cess collected by the Centre go towards funding state development and welfare needs through various central government schemes and initiatives.
Compensation cess, which goes entirely to the states, accounts for a substantial chunk of the total cess collected by the Central Government.
Another source said that calculations show that GST revenues will go up on a sustained basis once the new 2-tier slab is implemented.
“Similar revenue concerns were expressed when the compensation cess period ended in June 2022. But GST revenues have improved over time, and the average tax buoyancy of states improved to 1.23 as against 0.65 pre-GST. With GST reforms proposed by the Centre, tax buoyancy will improve steadily,” the second source said.
The compensation cess mechanism was initially put in place for a 5-year period till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation. GST had subsumed over a dozen local taxes and levies and was rolled out on July 1, 2017.
The levy of compensation cess was later extended by 4 years till March 31, 2026, and the collection is being used to repay the loan that the centre had taken to compensate states for the GST revenue loss during the COVID period.
