Transactional

Indian state finance chiefs to seek relief as tax revenues collapse

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India's Finance Minister Nirmala Sitharaman holds up a folder with the Government of India logo, while India's Chief Economic Advisor Krishnamurthy Subramanian looks on (at rear), as she leaves her office to present the federal budget in the parliament in New Delhi, India, February 1, 2021. REUTERS/Anushree Fadnavis/File Photo

NEW DELHI/MUMBAI, May 26 (Reuters) - India's top finance officials will at a meeting on Friday discuss compensation for states that are already battling lower tax revenues while also gearing up for more expenses linked to COVID-19 vaccinations, government and industry officials said.

A review of taxes on medical equipment and supplies is also likely to be on the agenda as India battles a devastating second wave of COVID-19 infections, they added.

Centre and state governments are staring at an estimated drop in tax revenues of about 2 trillion rupees ($28 billion) in the year to March 2022, three government officials said, while the centre's directive for states to fund vaccinations for adults below 45 years will further add to states' woes.

Also, the centre owes states 630 billion rupees in goods and services tax (GST) dues and surcharges for 2020/21.

"The central government should definitely compensate," T.S. Singh Deo, finance minister of the central Indian state of Chhattisgarh told Reuters ahead of the Goods and Services Tax Council meeting this week.

The GST Council, led by federal Finance Minister Nirmala Sitharaman and comprising all states' finance ministers, will be meeting after a gap of more than seven months.

Ministers from West Bengal, Tamil Nadu and Kerala, where Prime Minister Narendra Modi's party lost state elections this month, and other opposition-ruled states are expected to raise questions on state revenues and demand better compensation, an official from one of the states said.

While the federal government may not be in a position to provide immediate cash relief, it may look at ways to extend a surcharge on GST rates beyond 2022 and offer soft loans to states that need immediate funding, analysts said.

GST, India's biggest tax reform, was introduced in 2017 to replace an array of federal and state duties. State governments were promised a surcharge on the taxes for five years to make up for any losses incurred due to GST implementation.

A surcharge on GST rates on luxury goods may also be extended to compensate states, said an official with direct knowledge of the matter, who did not want to be named as he was not authorised to speak to media.

Some states plan to seek federal compensation beyond the current June 2022 deadline under the 14% annual increase in GST revenue growth guaranteed to them, analysts said.

In a letter to Sitharaman, Punjab finance minister Manpreet Badal has sought a review of the 12-18% GST rate and import tax on medical products like oxygen cylinders, ventilators and drugs like Remdesivir and Fabiflu.

"We need to take some urgent measures on the pandemic front," Badal said.

Additional reporting by Jatindra Dash in Bhubaneswar; Editing by Himani Sarkar

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