GST Compensation: A Good-Faith Decision Will Be Only Solution, Says Pazhanivel Thiagarajan

All states present at the Goods and Services Tax Council meeting urged the government to extend the compensation for 2-5 years but there was no resolution, according to Tamil Nadu’s Finance Minister Pazhanivel Thiagarajan.

“As far as I can remember, the discussion was kicked off by Karnataka Chief Minister Basavaraj Bommai and all states present also asked for extension of [GST] compensation,” Thiagarajan said after the June 28-29 GST Council meeting concluded in Chandigarh. “...Only a few states said the compensation is a double-edged sword as it gives room for some states to not tune up their systems, and that it must be thought-out carefully.”

Indicating that the last word must lie with the consensus of the council in accordance to the spirit of cooperative federalism, he said, “We were all in the room and we have all made requests, but it didn’t come to a resolution.”

“…Considering that the GST Council is federal and operates on state consensus, how will any decision (if devised) between today and the next meeting (without states’ input) be in the spirit of cooperative federalism?” he said. “If the matter is put to vote, all states would agree for an extension in compensation.”

When the GST was instituted in 2017, states were assured compensation for the loss of revenue arising from its implementation. The additional revenue support was assumed at a yearly compounded growth rate of 14% for five years. This support, guaranteed by the Constitution, ends on June 30, 2022.

Union Finance Minister Nirmala Sitharaman, in her briefing on Wednesday, said “the states were heard” on the issue of compensation. But a conclusive response to it was neither conveyed nor implied.

According to Thiagarajan, there are other sophisticated structuring possibilities to give states some compensation. “Only a good-faith decision with good quantitative accounting and analysis would give a solution.”

In Tamil Nadu’s budget revenue projections, the state accounted for the compensation amount only till June, along with other dues owed to it at the time of presentation at the state assembly on March 18, 2022.

Meeting Duration

While a notice for the council meeting was served two weeks in advance according to the procedure, its frequency was one of Thiagarajan’s concerns.

“The design of the council is to meet every three months. Then why is it that the council only meeting once in nine months, when there’s so much to work to be done?” he said.

This was the first full session since September 2021, barring an emergency meeting called on Dec. 31 with a single-point agenda of rolling back the correction in inverted duty structure for textiles.

The next council meeting is expected to take place at Madurai in the first week of August, as announced by Sitharaman—that’s in less than three months.

Other Recommendations

Thiagarajan is also a member of the group of ministers for casinos, racecourses and online gaming. The GoM has been granted a 15-day extension to hear states’ concerns on these three and incorporate them in their report before the matter once again comes before the council in the August meeting.

The next meeting will also include recommendations from the newly formed GoM for setting up of an appellate GST tribunal for speedy resolution of disputes. The decision to constitute the GoM was announced by the finance minister on Wednesday. Details on the conveners of the GoM and the members, however, have not been revealed yet.

Thiagarajan said he has proposed that the terms of reference for this GoM should include recommendations for new legislations the council could incorporate; suggestions on the model of tribunal to be followed and clarity on the extent of the tribunal’s powers.