If the states agree, it would effectively mean that the cess would continue beyond five years of the GST rollout.
Deloitte India Partner M S Mani said any decision to extend the cess beyond five years in order to fund the present compensation deficit could become a precedent. Hence, the period of extension of the cess should be minimal and predefined so that the cess does not become a permanent tax.
“Not considering any rate increases to make up for the shortfall in cess is a welcome measure, however moving to a market borrowing mechanism which would extend the tenure of the cess beyond five years would worry businesses that are subject to the cess,” Mani said.
Shardul Amarchand Mangaldas & Co Partner Rajat Bose said the Centre has put the onus on the states to borrow funds with due facilitation from the central government at a reduced rate of interest, which can be paid back after five years from the collection of cess.
HostBooks Ltd founder and Chairman Kapil Rana said the government is working on various modalities and one of them is that the compensation cess levy can be extended beyond five years.
“This is a welcome move that the GST Council has not proposed any increase in tax rates,” he added.
PwC India Partner and Leader Pratik Jain said it is clear now that the period of compensation cess would be increased beyond five years as contemplated at the time of GST implementation
“However, it’s good to see that GST Council did not discuss the possibility of immediate rate increase in cess which is not desirable in the current economic environment,” Jain said.
EY Tax Partner Abhishek Jain said “in either of the options, the outcome typically would culminate into compensation cess levy continuing beyond the originally anticipated five years.”
DVS Advisors LLP Founder & Managing Partner Divakar Vijayasarathy said, “Considering the current scenario of economy, the states might be left with no other option but to insist the Council to consider increasing the cess or including more products or extending the levy of cess by some more years…”
“… approaching RBI instead of the market to avoid making the interest yield dearer to the states seems logical,” he added.
India Law Alliance Partner Sumit Batra said the central government in its bid to end the woes of the states to mitigate the deficit caused due to shortfall in GST collections and lockdown has completely ignored the plight of the states.
“The compensation cess was designed to cover any losses that the states may incur due to the implementation of GST. Cess payments to states have been overdue for some time and are being gradually released to states.
“While the states are facing acute shortage of funds to meet their day to day expenses, the way central government has asked the states to borrow the shortfall from RBI at the reasonable rate of interest or to chalk out a plan in consultation with RBI will only result in collapse of respective state economy,” Batra added.
GST collections, including that of compensation cess, had been falling short of the targets even before the pandemic, making it difficult for the Centre to compensate the states.
In 2017, 28 states agreed to subsume their local taxes such as VAT into the new, nationwide Goods and Services Tax (GST), in what was hailed as the biggest tax reform.
At that time, the Centre had promised to compensate states for any revenue loss for the first five years from a pool created by levying cess over and above the GST on luxury and sin goods.