Karnataka wants the Central government to extend compensation of the Goods and Services Tax (GST) to the state till 2025 from 2022 as stipulated, said Chief Minister H.D. Kumaraswamy on Thursday.
"Kumaraswamy asked Union Finance Minister Arun Jaitley in New Delhi to extend the GST compensation to the state till 2025 from 2022, as revenue deficit against protected revenue may continue," said the Chief Minister's Office (CMO) in a statement in Bengaluru after their meeting in New Delhi.
As an indirect tax regime, GST was introduced on July 1, 2017 across the country in lieu of various levies like central sales tax, commercial tax, value added tax and octroi for transfer of goods through inter-state goods transport.
"Compensation to the state for the first 5 years, as envisaged in the GST Act, will limit fund allocation to various welfare schemes for the people and infrastructure projects in the state," said the CM0 statement.
Although GST collection in the southern state has improved in fiscal 2018-19 over the previous fiscal (2017-18), the gap between actual and protected revenues is substantial and may continue beyond 2022.
Apprising Jaitley of the situation in Karnataka, the Chief Minister said the state's revenue from indirect taxes like VAT grew 10-12 per cent annually.
"Post-GST, the state has 20 per cent revenue deficit as against its protected revenue since the new tax regime since July 2017," said the statement.
While Karnataka is making efforts to minimise revenue leak, the state has cited structural reasons for the revenue deficit from the present GST rates and due to lower contribution by the services sector.
"As the state government has social schemes and infrastructural projects to improve the quality of life of its people, the Chief Minister sought extension of the compensation tenure by another 3 years," it added.
According to the state Finance Ministry sources, Karnataka received Rs 7,535 crore as compensation for fiscal 2017-18, one of the highest among the states.
After the compensation extension figured in the December 22 meeting of the GST Council, Jaitley in a blog on Monday admitted that the GST targets were steep for the states to achieve.
"The targets set for the states in the GST regime are high. Even though GST commenced on July 1, 2017, the base year for revenue increase calculated is 2015-16. For each year, a 14 per cent increase is guaranteed," said Jaitley in the blog.
With three 14 per cent increases compounded annually over the base year (2015-16), which is closer to a 50 per cent being reached in the second year, it is almost an unachievable target.
As many states struggle to achieve the collection targets, the Central government has been mulling extending the compensation period against the revenue loss by three more years from 2022.