Finance ministry not in favour of  raising GST rates on non essentials

Under the GST (Compensation to States) Act, 2017, protected revenues of the state governments is calculated on the basis of a 14% annual growth rate with FY16 as the base year

The finance ministry is not in favour of raising goods and services tax (GST) rates even on non-essential items at a time its revenue collections are expected to be badly hit by the lockdown to contain the spread of covid-19.

“Post-lockdown, demand has to be induced and economic activity has to improve on all fronts, not just on essential items. Who are we to decide what is non-essential? However, the GST Council will take a final call on the matter," said a finance ministry official, seeking anonymity. The Council may meet in June, he added.

The Centre eased curbs in Lockdown 4.0, which is scheduled to end on 31 May, and allowed businesses to restart operations. However, the more than two-month lockdown and the reverse migration of workers from urban and industrial centres to rural areas have crippled economic activity.

The Council may also take up the issue of compensating states for revenue shortfall by borrowing from the market. Under the GST (Compensation to States) Act, 2017, protected revenues of the state governments is calculated on the basis of a 14% annual growth rate with FY16 as the base year.

The gap between state governments’ SGST collections and protected revenues must be released by the Centre as GST compensation for the first five years of the GST regime.

Icra estimated that out of ₹1.7 trillion compensation requirements in FY20, ₹1.2 trillion was released by the Centre, leaving an unpaid balance of ₹50,500 crore at the end of March.

Jayanta Roy, group head, corporate sector rating, Icra Ltd, said with the covid-19 crisis expected to shrink non-essential consumption, state finances will undergo a dual shock. “The SGST collections will contract by 30% in FY21 to ₹3.5 trillion, while cess collections meant to be funnelled towards GST compensation will dry up."

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