2nd MeetingSep 30, 2016

GST Council Meeting 2 — Compensation Formula, RNR & Subsumed Taxes

The 2nd meeting established the compensation framework (2015-16 base, 14% growth, 5 years), confirmed 17 taxes to be subsumed into GST, reviewed the Subramanian Committee's Revenue Neutral Rate, and assessed GSTN IT infrastructure readiness for the April 2017 target.

2nd

Meeting Number

Sep 30, 2016

Date

1 Day

Duration

New Delhi

Venue

6

Agenda Items

17 Taxes

Tax Replaced

2015-16

Base Year

14% YoY

Growth Rate

Key Discussions & Agreements

Compensation Formula Discussion

Central issue: how to compensate states for potential revenue loss under GST. Council discussed base year (2015-16 state revenue from subsumed taxes), projected growth rate (14% compounded annually), and compensation period (5 years). If actual GST revenue falls below projected trajectory, the gap is compensated. This formula became the foundation of the GST (Compensation to States) Act, 2017.

Taxes to be Subsumed

Confirmed 17 taxes to be subsumed: Central — Excise Duty, Service Tax, CVD, SAD, Central Sales Tax. State — VAT/Sales Tax, Entry Tax, Purchase Tax, Luxury Tax, Entertainment Tax, Octroi, LBT. This consolidation into one GST (CGST + SGST/IGST) eliminates cascading, multiple compliances, and tax-on-tax effect. Most transformative indirect tax reform since independence.

Subramanian Committee Report

Council examined the Revenue Neutral Rate (RNR) report by Chief Economic Adviser Arvind Subramanian. Key findings: RNR = 15-15.5% (single rate). If multi-rate: standard rate 17-18%, lower rate 12%, demerit rate 40%. Report recommended fewer slabs for simplicity. Council members debated whether 2 slabs (standard + luxury) or 4 slabs were appropriate.

Exemption Threshold Discussion

Preliminary discussion on exemption thresholds: traders with turnover below threshold not required to register. Proposed: ₹25 lakh (general), ₹10 lakh (special category states). Later revised to ₹20 lakh / ₹10 lakh at Meeting 4. Service providers to have same threshold (unlike pre-GST where service tax threshold was ₹10 lakh and VAT varied 5-10 lakh by state).

GST Network (GSTN) Status

Update on GST Network IT infrastructure: GSTN (Goods and Services Tax Network) being developed as the technology backbone. Registration, return filing, payment, and refund — all online. System design: no physical touchpoints. Infosys selected as Managed Service Provider. Target: handle 3 billion invoices per month, 8 million taxpayers initially. Timeline: ready by April 2017 launch.

Constitutional Framework Review

Council reviewed the 101st Constitutional Amendment (passed August 2016) that created the legal basis for GST: Article 246A (concurrent taxing power), Article 269A (IGST), Article 279A (GST Council with 2/3 weighted voting — Centre 1/3, States 2/3). Council noted that legislative framework (CGST, SGST, IGST, Compensation bills) needed drafting within months.

Meeting 2 — Agreements & Outcomes

TopicStatusDetail
Compensation base year: 2015-16AgreedState revenue from subsumed taxes as baseline
14% annual growth assumptionAgreedCompounded for 5-year projection
17 taxes to be subsumedConfirmedCentral excise, service tax, VAT, entry tax, octroi, etc.
RNR at 15-15.5% (Subramanian report)NotedUsed as benchmark for rate structure design
Exemption threshold preliminaryDiscussed₹25L/₹10L proposed (later ₹20L/₹10L)
GSTN IT readinessReviewedInfosys MSP, target April 2017 go-live
Legislative drafting timelineAcknowledgedCGST/SGST/IGST bills needed by December 2016
Compensation cess mechanismIn-principleLevy on luxury/sin goods for compensation fund

Frequently Asked Questions

What was decided at GST Council Meeting 2?
The 2nd meeting (September 30, 2016) focused on the state compensation framework: agreed on 2015-16 as base year with 14% annual growth projection for 5 years. Reviewed the Subramanian Committee's RNR recommendation (15-15.5%). Confirmed 17 taxes to be subsumed. Discussed exemption thresholds. Reviewed GSTN IT infrastructure readiness. This was a foundational meeting that set the revenue protection framework for states.
How many taxes were replaced by GST?
GST replaced 17 Central and State indirect taxes: Central taxes — Central Excise, Service Tax, Countervailing Duty (CVD), Special Additional Duty (SAD), Central Sales Tax (CST). State taxes — VAT/Sales Tax, Entry Tax/Octroi, Purchase Tax, Luxury Tax, Entertainment Tax, Taxes on Betting/Gambling, State Cesses, LBT (Local Body Tax). This 'One Nation One Tax' eliminated all cascading and created a unified market.
What is the Subramanian Committee RNR?
The Subramanian Committee (2015, chaired by Chief Economic Adviser Arvind Subramanian) calculated that a single GST rate of 15-15.5% would maintain combined Centre+State revenue at pre-GST levels. If multiple rates used: standard rate 17-18%, lower rate 12%, demerit rate 40%. The committee recommended fewer slabs (2-3) for simplicity but the Council chose 4 slabs (5/12/18/28) for equity — protecting essentials while taxing luxury.
Why was 14% growth rate chosen for compensation?
14% was chosen as a political compromise: states demanded 16-18% (reflecting their historical VAT growth rates). Centre argued for 10-12% (more conservative). 14% was agreed as middle ground. This means if a state collected ₹100 Cr from subsumed taxes in 2015-16, its projected revenue for 2017-18 = ₹100 × 1.14² = ₹130 Cr. If actual GST collection is ₹110 Cr, compensation = ₹20 Cr gap.
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