Finance ministry officials have said increasing the average goods and services tax rate closer to the revenue neutral rate of about 15 per cent would help the states in getting more revenue and reduce their dependence on the Centre for compensation for any shortfall.

There is a growing clamour among states to extend the compensation beyond June 2022.

The officials said in the last GST Council meeting, there was a discussion on getting the indirect tax rates closer to the revenue neutral rate as one of the solutions to address the compensation issue.

A committee headed by the then chief economic adviser Arvind Subramanian had suggested a range for the revenue neutral rate of 15-15.5 per cent, with a strong preference for the lower end of that range.

An official said many states, including some ruled by the Bharatiya Janata Party, had demanded that the compensation period should be extended by another three to five years.

“It is time to correct the rates in the absence of a guarantee on 14 per cent revenue buoyancy to states… the discussion on the issue has just been initiated,” the official added.

The GST Council had reduced the rates on several items, especially before the 2019 general elections, which led to the average rate falling below the revenue neutral rate, the official said.

After the GST Council meeting, finance minister Nirmala Sitharaman said the GST regime had originally been premised on a revenue-neutral tax rate of 15.5 per cent. However, the actual GST revenues have been going down with the effective tax rate slipping to 11.6 per cent due to the changes made in the tax rates on various goods and services over the last few years.

“A detailed presentation was made on the revenue generation aspects, correction of inverted duty structure aspects and the various ways in which the revenue neutral position, which was 15.5 per cent at the time of introduction of GST, has steadily come down to 11.6 per cent, she said.

The GST Council to shore up revenues has decided to form two groups of ministers that have to recommend measures within two months.