How will the Centre ensure States’ finances are not hurt?

GST will subsume almost all cesses levied at the moment

A cut-out of PM Narendra Modi, with GST posters in New Delhi on Friday.

One of the key sticking points thwarting consensus in the Goods and Services Council over the course of its meetings in 2016 was the compensation the Centre would have to pay States for any losses they might incur due to the implementation of the new indirect tax regime.

What was the issue?

The GST is a destination-based tax, and as such is viewed as being to the advantage of the consuming States and to the detriment of the producing States like Maharashtra, Tamil Nadu, Gujarat, Haryana, and Karnataka.

These States had raised objections to the implementation of GST, forcing the Centre to agree to a formula for compensating them in the event of a loss of revenue. The 14th Finance Commission advised the Centre to provide 100% compensation to States for their revenue loss after implementation of GST for the first three years. The fourth year would bring 75% compensation, and the fifth year 50% compensation.

This, however, did not pacify the States who demanded full compensation for five years. The Centre agreed to this demand in December 2016, settling one of the most contentious issues delaying GST.

The next question, however, was how the Centre was going to finance this compensation package, which experts estimated could be as much as ₹55,000 crore.

Where are the funds?

The GST, once implemented, will subsume almost all the cesses levied at the moment, including Swachh Bharat Cess and Krishi Kalyan Cess. Other cesses like the education cess on imported goods and the cess on crude oil will remain under GST. However, the government needs extra revenue to compensate the States, and so the GST Council decided to impose additional cesses for five years on certain goods over and above the highest tax bracket of 28%. These goods on which cess will be levied include tobacco products, coal, motor vehicles, which include all types of cars, personal aircraft, and yachts.

These additional cesses, however, will be removed after five years, Finance Minister Arun Jaitley has repeatedly said, adding that the States incurring losses would have to find alternative sources of revenue.