GST Council members divided over rate cuts amid poor revenue collection

"State officers during a various meeting with the central government have already voiced their concerns on states revenue protection. States are clear that they want the centre to continue to protect their revenues," sources in the know told CNBC-TV18.

Meanwhile, sources also added that "the central government is currently weighing all its options before it pushes any item for a rate cut keeping in view compensation payout to states and simultaneously centre also has to continue to work towards achieving the budget targets."

The central government has already compensated the states with Rs 45,744 crore till July as against the collections of Rs 32,406 crore, under-compensation cess, in July.

The central government has to compensate the states for a 14 percent revenue growth through collections under-compensation cess. Central Goods and Service Tax (CGST) collections till July stand at Rs 1.40 lakh crore as against the budgeted target of Rs1.76 lakh crore.

The union budget has targeted Rs 5.26 lakh crore for Central GST collections for the entire fiscal, which means a Rs 44,000 crore of monthly collections target.

Pratik Jain, Partner, Indirect Tax at PWC India said there is very limited room for rate cuts as the government is looking at a shortfall of anywhere between Rs 40,000-45,000 crore, “Therefore, rate cuts will be more difficult and particularly given the fact that states have also objected. Kerala has said it should happen on the cess and not on the basic rate per se.”

According to MS Mani, Partner at Deloitte, economic activity is the main reason for the poor revenue collections, not the GST rates.

"First is the fact that on virtually every product that we have in-country the rates in GST are either equal to or lower than the pre GST rates. So, there is no product available today where the rates are higher than the pre GST rates which included excise and VAT. We have to bear in mind that we are comparing the collections of any month of the current year with the collections of the previous year same month. However, there has been a reduction of rates subsequent to that particular month," Mani said.

Also, Thomas Isaac, Kerala's finance minister has opposed to any further rate reduction for a simple fact that the GST rate is below the pre GST rates.