Petroleum still kept out of GST and Compensation Cess to be extended.   (GS 3, Economics, The Hindu, Indian Express)

Petroleum still kept out of GST and Compensation Cess to be extended.   (GS 3, Economics, The Hindu, Indian Express)

Context: The states after the rollout of GST are facing losses in revenue collection and complaining that the Centre is not paying the compensation to the states amounting to a breach of law (GST Act). 

News: The Goods and Services Tax (GST) Council has announced to keep petroleum products out of the ambit of the GST regime, while consumers will have to keep paying the Compensation Cess levied on products like automobiles till March 2026 instead of July 2022 as originally envisaged at the time of rolling out the GST.

Let’s Understand the issue first: When GST was implemented in 2017, it came with the constitutional amendment. The powers of Centre and States of imposing and collecting indirect taxes, which were given by the constitution were amended. Earlier the centre was collecting the taxes on the production of goods (Excise duty) and Services (service tax) while states were having the power of collecting taxes on distribution or selling of goods ( sale Tax/VAT). But with the rollout of GST in 2017, these powers of centre and states were gone and a new system of GST was established, in which all existing taxes levied during the process of production (excise duty) and distribution (sale tax/ VAT) of goods and services and some other (not all) cesses and surcharges (tax on tax) were merged and renamed as GST.                                                                           Now say if 1000 as GST is collected then 500 will be going in the hand of the state in name of SGST and 500 will go to the centre in the name of CGST. With this, say, earlier states were getting 600 in total from Sales tax/ VAT. So in the said example actually States are having losses (of 100) in the new GST system. To avoid this the Centre had provisioned in GST Act itself that it will compensate states for losses by levying an extra compensation cess (extra burden on people) for five years. This extra compensation cess was levied for the said purpose from 2017 to 2022. The States these days are complaining that a huge amount of compensation is due on centre. And this is one of the major reasons for extending the compensation cess for more four years till 2026. 

Why Government not including petroleum in GST

“Union Finance and Corporate Affairs Minister Nirmala Sitharaman, who chaired the first physical meeting of the Council in nearly two years, said a discussion on including petroleum products in the GST regime was held purely at the behest of the Kerala High Court, which had suggested that the Council take it up in response to a writ petition.

“The Council members spoke very clearly that they don’t want petroleum products to be included in GST at this time. We shall report the same to the court that the Council has discussed it as per their desire, and the GST Council felt this wasn’t the time to bring petroleum products into GST,” Ms. Sitharaman said.

The Minister also indicated that the Union government is not inclined to consider some States’ demand to extend the five-year period for which they have been assured a 14% revenue growth for giving up several taxation powers to pave the way for implementing the GST regime. “Legally, compensation was to be paid for five years till July 2022 with an assured level of revenue for the States,” Ms. Sitharaman said.” (The Hindu)

Md Layeeque Azam, Economics Faculty

Plutus IAS Daily Current Affairs 20th September 2021

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