NEW DELHI: The Central government is considering paying up a part of the compensation due to states for the August-September period as it fears that further delay could trigger a legal challenge on non-payment.
However, given its cash flow situation, the Centre will try and get the states to agree to delayed payment of compensation as well as to an increase in Goods and Services Tax (GST) rates on certain items. While the states are unwilling to tax any of the essential items on the zero tax list as this move would be unpopular, the Centre will propose increasing taxes on luxury goods and some other ones, say officials.
Analysts say this would be detrimental to both the economy and tax collection efforts. “This could be counterproductive as the industry, already in the throes of a slowdown, could see sales dropping if prices went up due to higher taxes. Which, in turn, would reduce tax collections,” said Sumit Dutt Majumder, former chairman, Central Board of Excise & Customs.
According to top officials, a part payment for the compensation dues for August and September — which was meant to be paid in October itself — would be made soon. The Centre had collected some `64,528 crore till October this year, but paid out compensation only for the first four months of the year.
States are paid out of a compensation cess fund into which taxes of ‘sin’ goods, levied at the maximum rate of 28 per cent, are pooled.
Officials said the Constitutional provisions are clear that the first charge on monies in this fund is with the states. In case the cess collected falls short of the money to be paid to states, the Centre has to find ways of adding to the kitty.
However, even if a part payment is made now, officials said, the Centre will still be short of cash to pay future instalments to states. Already the dues to all states together is estimated to be over Rs 50,000 crore and an increase in taxes is possibly the only way out.
Centre’s GST dues to states run deep
Even if a part payment is made now, officials say, the Centre will still be short of cash to pay future instalments to states. Already the dues to all states together is estimated to be over Rs 50,000 crore.