16th Finance Commission set to examine GST revenue

The Sixteenth Finance Commission set to examine GST revenue collections of states under the Goods and Services Tax (GST) and the need for a review of the GST compensation Cess.

The Finance Commission, a Constitutionally mandated body under Article 280 of the Constitution that determines the transfer of taxes between the Centre and the states for a period of five years, is expected to be established by the end of the month or early December. It will recommend a method for dividing revenues between the Centre and the states over a five-year period beginning with the financial year 2026-27.

According to sources, the panel would be given the mandate to assess GST revenue collection and whether there is a shortfall for states once the compensation Cess expires.

The Cess, which is imposed on luxury, sin, and demerit goods, was initially implemented for a five-year period alongside GST on July 1, 2017, to assist states in meeting any shortfall from the new indirect tax regime. While it officially ended in June 2022, the amount of money collected through the Cess is being utilised to repay the interest and principal on the Rs. 2.69 lakh crore borrowed by the Centre for states during the Covid-19 pandemic.

The GST Council, headed by Nirmala Sitharaman (Union Finance Minister), had its most recent meeting in October and discussed how to allocate the cess revenue after March 2026. After a few states raised the issue, the Council is now anticipated to decide on the names of the ‘GST compensation cess’ and the modalities for its distribution among the states.

According to sources, the finance panel would be able to take a far closer glance at the issue and provide recommendations after receiving a complete picture of predicted GST revenue over the next few years.

A rate rationalisation of the GST is also in the functions, but it appears that this will be delayed until after the General Elections next year.

Various reports have emphasised the necessity to reform the tax structure and revenue collections by state governments.

Most states’ compensation needs were higher in 2021-22 than in 2018-19. However, after June 2022, states that were more reliant on GST compensation, which includes Puducherry, Punjab, Delhi, Himachal Pradesh, Goa, and Uttarakhand, are likely to be impacted the most.

The Sixteenth Finance Commission has already been set up by the government. Ritwik Pandey, a 1998-batch IAS officer of the Karnataka cadre who was Joint Secretary, Department of Revenue, Ministry of Finance, was appointed earlier this month as Officer on Special Duty for the financial panel’s Advance Cell. The panel’s terms of reference, as well as its members, are expected to be revealed soon.