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Compensation to Cantonment Boards for Revenue Loss on Account of GST

Sacchidananda Mukherjee (sachs.mse@gmail.com) is with the National Institute of Public Finance and Policy, New Delhi.

The introduction of the goods and services tax has resulted in a subsummation of taxes like local body tax, which used to be collected by “local authorities.” Consolidation of tax base under the GST by including various taxes of union, state and local governments resulted in a single tax base. On the consolidated tax base, both union and state governments collect GST concurrently. Since the tax base of LBT is subsumed under the GST, the demand for compensation by the local authorities (including cantonment boards) is justified. Unless there is assignment of new tax handles to local authorities, it is perpetual revenue loss for them.

The Government of India under the Gazette Notification SRO No 318 dated 29 October 1959 had given power to the cantonment boards to levy and collect octroi in their jurisdiction. The cantonment boards used to collect octroi either on their own or through the neighbouring municipal corporation. In the case of outsourcing the collection of octroi to the local municipal corporation, there was a special agreement between the cantonment boards and the municipal corporation with reference to the sharing of revenue on account of octroi collection from the jurisdiction of the board (for example, agreement between the Pune Cantonment Board [PCB] and Pune Municipal Corporation [PMC]). The local municipal corporation used to share certain tax proceeds with cantonment boards on the basis of the agreement. The agreement was void till 31 March 2013 as long as octroi was in force. However, the abolition of octroi from 1 April 2013 and the introduction of local body tax (LBT) subsequently invalidated the agreement between cantonment boards and municipal corporations. The cantonment boards, which were earlier collecting octroi on their own, continued doing so (for example, Dehuroad Cantonment Board or DCB in Maharashtra), whereas the cantonment boards that outsourced their octroi collection to local municipal corporations asked permission from the Ministry of Defence (MoD) to exercise their taxation power in the collection of LBT independently (for example, the PCB). In the case of the PCB, the MoD sanctioned the permission in 2015 and the PCB started the collection of LBT from 4 June 2015. The PCB continued the

collection of LBT till the introduction of goods and services tax (GST) on 1 July 2017. However, some cantonment boards did not either seek or receive permission from the MoD to introduce LBT (for example, the Kirkee Cantonment Board or KCB). There is no revenue sharing agreement between PMC and the two cantonment boards (PCB and KCB) from 1 April 2013.

The introduction of the GST has resulted in a subsummation of taxes like octroi, LBT, entry tax, entertainment tax, and so on, which were earlier used to be collected by local bodies/authorities and/or cantonment boards. This leads to considerable revenue loss to local bodies and cantonment boards. Now the question is: What is the mechanism enshrined in the GST Acts and Rules to provide compensation for such revenue loss? The Goods and Services Tax (Compensation to States) Act, 2017 (No 15 of 2017, dated 12 April 2017) (hereafter Union Government Compensation Act) mentioned that

the base year revenue for a State shall be sum of the revenue collected by the State and the local bodies during the base year, on account of the taxes levied by the respective State or Union and net of refunds, with respect to the following taxes, Union Government Compensation Act imposed by the respective State or Union, which are subsumed into goods and services tax. (Section 5[1])

So far as compensations to local bodies are concerned, Maharashtra has passed the Maharashtra Goods and Services Tax (Compensation to the Local Authorities) Act, on 29 May 2017 (hereafter Maharashtra Compensation Act). The act considers a narrow definition of local authority comprising only 27 municipal corporations without incorporating cantonment boards.1 Since there is no valid revenue sharing agreement on account of octroi and/or LBT between cantonment boards and municipal corporations, it is expected that any revenue loss to cantonment boards on account of the introduction of GST may not be reflected in the budgets of the municipal corporations located in Maharashtra. If the budgets of municipal corporations do not include any loss of cantonment boards on account of any taxes that are subsumed under the GST, there is no provision in the Maharashtra Compensation Act to provide compensation for the same, as it is specifically mentioned that

The base year revenue for a local authority other than Municipal Corporation of Brihan Mumbai, shall be the revenue of the base year, net of refunds, with respect to entry tax, octroi, local body tax, cess or any other tax levied and collected under the erstwhile entry 52 of List-II (State List) of the Seventh Schedule to the Constitution of India, as it stood prior to bringing into effect the provisions of the Constitution (One Hundred and First Amendment) Act, 2016. (Section 5[2])

Now the question is: What will be the mechanism to compensate cantonment boards for their revenue loss on account of introduction of GST?

The Union Government Compensation Act does not define “local bodies,” and for that matter, one needs to consider the definitions provided in the Central Goods and Services Tax (CGST) Act, 2017 (Act 12 of 2017, dated 12 April 2017). The CGST Act defines “local authority” in Section 2(69) and it includes cantonment board as defined in Section 3 of the Cantonments Act, 2006 (Section 2[69][d]). Since the Union Government Compensation Act considers inclusion of cantonment boards in the definition of “local bodies,” it was expected from the Government of Maharashtra (GOM) to take into account those cantonment boards that are located in the state, in making the list of “local authority” for the purpose of GST compensation for the revenue loss. In articulating demand for GST compensation to the union government, the GOM should have taken into account the losses incurred by cantonment boards for the introduction of GST. Since many states, where cantonment boards are located, have still not passed the State Compensation Act (for example, Haryana, Madhya Pradesh, Punjab, Rajasthan, Telangana, Uttarakhand, Uttar Pradesh), it is expected that they will consider the inclusion of cantonment boards in the definition of “local authority” and in providing the GST compensation. It is expected that the GOM would amend the GST Compensation Act and include cantonment boards in the list of “local authority.” In absence of GST compensation, there will be substantial fiscal stress to cantonment boards and it will restrict delivery of public services provided to two million people residing in different cantonment boards.

It is to be mentioned here that with the introduction of GST, the tax base corresponding to LBT that cantonment boards and other local authorities used to collect has subsumed under the tax base of the GST and is concurrently taxed by the union and state governments. Since local authorities (including cantonment boards) no longer have access to the tax base (corresponding to LBT), under the federal structure, demands of local authorities for compensation of revenue loss from the state government are justified. Now the question is whether any compensation will be provided to cantonment boards and local authorities perpetually or for a specific time period (transition period). Under the Union Government Compensation Act, states will receive compensation from the union government on account of any revenue shortfall in state GST (SGST) collection from the projected SGST collection during the transition period only, that is, in the first five years of GST implementation. The projection of SGST revenue is based on an annual nominal growth rate of 14% with reference to net collection of taxes subsumed under the GST in 2015–16. As after the introduction of the GST, local authorities no longer have access to the tax base corresponding to LBT; therefore it is a perpetual revenue loss to them. Unless or until the state government assigns any new additional revenue sources/taxation power to local authorities, continuing with compensating the losses of local authorities is the responsibility of both union and state governments, as both the governments are sharing the common tax base under the GST. Now the question is: If the compensation is provided to cantonment boards perpetually, what will be the mechanism for the same?

Compensating Cantonment Boards

Taking cue from the Maharashtra Compensation Act, the union government may consider devising rules for compensating cantonment boards. The Maharashtra Compensation Act also clarifies the process of compensating municipal corporations for the base year (that is, 2016–17) and subsequent years thereafter, in Sections 5(2), 6 and 7 of the act.

Base Year Revenue

For GST compensation to local authorities, the GOM considers 2016–17 as the base year, instead of 2015–16 considered by the union government for compensation to states and union territories with legislative assembly. The Maharashtra Compensation Act also differs from the Union Government Compensation Act in projecting the revenue in three accounts: (i) GOM considers only 8% nominal growth rate in revenue projection with reference to the base year (that is, 2016–17), whereas the union government considers 14% year-on-year nominal growth in revenue as compared to the reference year of 2015–16 to ensure that states are protected from fluctuations in revenue due to the introduction of GST; (ii) in the Union Government Compensation Act, compensation is limited to the first five years of introduction of GST, whereas in the Maharashtra Compensation Act, the compensation to local authorities is perpetual; and (iii) in the Union Government Compensation Act there is no provision for the deduction of revenue on account of “accruable revenue assigned” as evident in the Maharashtra Compensation Act.2 It is to be mentioned here that if any additional revenue sources are assigned to the local authorities after the introduction of the Maharashtra Compensation Act, the proceeds from that additional source(s) of revenue will be deducted from the projected compensation to local authorities. If the state assigns any new sources of revenue to local authorities, the proceeds of the same will vary across years as well as across local authorities depending on their tax capacities and efforts. On the contrary, if the state does not assign any new revenue sources to local authorities, “accruable revenue” to local authorities would be nil. Therefore, it is expected that the compensation receivable from the state may vary depending on variations in revenue collection from newly assigned sources of revenue.

Section 5(2) of the Maharashtra Compensation Act clearly mentioned that for the purpose of compensation, revenue for the base year will be the net revenue collection on account of taxes subsumed under the GST.

The projected revenue for the period in the first year for a local authority, shall be calculated by applying the projected growth rate over the base year revenue of that local authority reduced by the amount of revenue collected, net of refunds, as specified in Section 5 upto the appointed date. (Section 6 of the Maharashtra Compensation Act)

The projected nominal growth rate of revenue, in perpetuity, for a local authority shall be 8% per annum to be compounded annually. (Section 3 of the Maharashtra Compensation Act)

In the first year of compensation, that is, 2017–18, the compensation of revenue will be provided on a monthly basis to local authorities based on provisional estimation and the final adjustment will be done after receiving the final revenue figures of receipts (Section 8[1]).

Compensation for Other Years

Beyond 2017–18, the revenue compensation formula is devised by the GOM by keeping in mind the base year (2016–17) revenue and 8% compounded annual growth rate. The accruable revenue from new sources of revenue assigned to local authorities will be deducted from the projected revenue.

The projected revenue, not being first year, for any year for a local authority, shall be calculated by applying the projected growth rate over the base year revenue of that local authority, net of refunds, by applying the principle of compounded growth rate as per Section 3. (Section 7 of the Maharashtra Compensation Act)

The revenue compensation will be disbursed on a monthly basis to the local authorities on a pro-rata basis based on projected revenue of the respective financial year.

It is to be mentioned here that all numbers in Tables 1 and 2 are examples and actual compensation to local authorities will vary depending on actual revenue collection during the first quarter of 2017–18 and the “accruable revenue assigned” after the introduction of the Maharashtra Compensation Act, 2017. Therefore, actual compensation receivable from the state government may vary depending on deduction on account of “accruable revenue assigned” from the projected revenue for the year.

 

Concluding Remarks

This conclusion is based on taxation power assigned by the union government and the historical journey of tax practices of three cantonment boards (such as the PCB, KCB and DCB) located in Maharashtra. The fiscal relationship between cantonment boards and the state government may differ in other cantonment boards located in other parts of India. With the introduction of the LBT by replacing octroi, there is no revenue sharing agreement between cantonment board and local municipal corporation, since 1 April 2013. The introduction of GST subsumes taxes like LBT which used to be collected by cantonment boards earlier. This has caused substantial fiscal stress for cantonment boards, as revenue collection from LBT constitutes a major share in the overall revenue collection of cantonment boards. The budgets of municipal corporations do not include revenue collection of cantonment boards on account of LBT or other taxes. Therefore, in the Maharashtra Compensation Act, there is no provision for compensating revenue losses of cantonment boards on account of the introduction of the GST. So, there is no provision for municipal corporations to share compensation received from the state government on account of the GST with cantonment boards. Moreover, in the present form, the Maharashtra Compensation Act does not include cantonment boards in the list of “local authority” provided in the schedule of the act. Therefore, there is no scope for cantonment boards to get compensation directly from the state government. However, the Union Government Compensation Act includes cantonment boards in the definition of “local body.” It is evident that Maharashtra Compensation Act has adopted a narrow definition of “local authority” by excluding cantonment boards from the list of “local authority.” Therefore, it is desirable that the GOM may consider amending the Maharashtra Compensation Act and include cantonment boards in the list of “local authority.”

The introduction of GST has resulted in a subsummation of taxes like LBT that were earlier collected by “local authorities.” The consolidation of tax base under the GST by including various taxes of union, state and local governments resulted in a single tax base. On the consolidated tax base, both union and state governments collect GST concurrently. Since tax base of LBT is subsumed under the GST, the demand for compensation by local authorities (including cantonment boards) is justified. It is the responsibility of the union as well as state governments to provide due compensation to local authorities. Unless there is assignment of new tax handles to local authorities, it is a perpetual revenue loss for them. By recognising this, the GOM makes a provision for perpetual compensation to local authorities. It is expected that the same compensation mechanism may be adopted for cantonment boards to provide compensation on account of revenue loss due to the introduction of the GST.

Notes

1 This comment is based on the Union Government Compensation Act which is discussed later.

2 “Accruable revenue assigned” is described in Section 8.2(b) of the Maharashtra Compensation Act as “The revenue accruable to the local authority shall be calculated and which shall be the revenue accruable on account of the taxes, fees or other sources of revenue assigned after the commencement of this Act to the local authority by the State Government and the revenue accruable on account of increase in rate of tax, amount of fees or increase in rate of other means of sources of revenue assigned before the commencement of this Act to the local authority by the State Government.”

Updated On : 13th Jan, 2020

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