With the Indian federal government facing heat from the states over delays in the goods and services tax (GST) pay-out, which has been pending since August, it finally released 353 billion rupees (US$4.98 billion) this week.

When the GST was rolled out on July 1, 2017, the states were promised compensation for the loss of revenue as the taxes charged by them were being subsumed into the new levy and their right to levy new taxes would also cease to exist.

New legislation was passed for this purpose.

The corpus for paying compensation to the states was collected by levying a tax on top of GST rates on tobacco products, cigarettes, aerated water, automobiles and coal. This compensation was to be released every two months. But it has been pending since August and there were protests, particularly from states ruled by opposition parties.

This pay-out comes only days before the 38th meeting of the GST Council – the highest decision-making body of the new indirect tax regime – on December 18, where the opposition-ruled states had planned to take up the issue of delayed payments, the Press Trust of India reported.

Opposition-ruled states such as Punjab, West Bengal and Kerala last month started demanding the immediate release of the GST Compensation Fund. Their finance ministers also met Union Finance Minister Nirmala Sitharaman and the issue came up during the just-concluded Winter Session of Parliament.

She assured the finance ministers that their dues would be cleared, but never mentioned any timelines for making the payments.

The finance minister mentioned in Parliament on December 12 that during the current fiscal year that started in April 2019, tax collections till October 31 were 555 billion rupees ($7.83 billion), but compensation released to the states was higher at 652 billion rupees ($9.2 billion).

The minister assured the states that the Centre would not “renege” on the promise of GST compensation. The delays to pass on the money were due to slippage in collections, she said.

She admitted that GST collections had been much lower than expectations. She attributed the dip in collections to a slip in GST filing due to natural calamities and also due to a slowdown in consumption that has a direct impact on the collections.

The government expected the average monthly collections to be more than one trillion rupees (US$14 billion). However, this year only four months saw collections of that amount.

Meanwhile, India’s recent festival season did little to lift economic activity. Car sales fell 6.3% in October from last year, according to data released by the Society of Indian Automobile Manufacturers. Two-wheeler sales were down 14.4% from a year earlier, while demand for trucks and buses were down 23.3%.

GST revamp

During the forthcoming GST Council meeting, it is expected the tax structure may be revamped. The existing minimum 5% rate may go to 6% to garner additional revenue of 10 billion rupees per month.

At present, the 5% slab includes essential commodities such as food items, basic clothing and footwear. Now the GST has four slabs of 5%, 12%, 18% and 28%.

The GST Council secretariat has also sought input from states on all these issues at the next meeting. In a bid to tackle dwindling GST collections, the government formed a committee of officers in October to suggest measures to boost collections and make businesses comply voluntarily.

Meanwhile, processed food companies have requested the Finance Minister to rethink a rumored hike in GST rates. The All India Food Processors’ Association wrote to the Finance Minister to convey the anxiety among the food industry over the proposed price hike on food prices.

The AIFPA consists of well-known brands such as ITC, Nestle, PepsiCo and Haldiram, as well as various small and mid-sized food processing companies.

The letter stated that the food industry had been struggling to maintain its operations due to severe financial constraints and an increase in GST rates would aggravate the sector’s troubles. This would be to the disadvantage of farmers, industry and the government.