3rd GST Council Meeting 
18–19 October 2016

Summary of Points Finalized in the Meeting

Definition of “Revenue” for Compensation Calculation

Input Tax Credit (ITC) reversals were agreed to be included in “revenue subsumed” for calculating compensation.

Revenues directly devolved to mandis or municipalities would also be included if collected under constitutional entries 52, 54, 55, and 62 and subsumed under GST.

For the eleven Special Category States (as per Article 279A), revenue foregone due to tax exemptions granted by States would be included in base year revenue (2015–16).

Central Sales Tax (CST) to be calculated at the actual rate of 2% (not notional 4%) for compensation purposes.

The projected growth rate for GST compensation fixed at 14% per annum.

Compensation Period and Mechanism

States to be compensated for five years for any revenue loss due to GST implementation.

Compensation to be calculated based on the difference between the projected revenue (at 14% growth) and the actual revenue collected under GST.

Compensation would be provided from a dedicated fund to be created for this purpose.

Finalisation of Tax Rate Structure (Rate Bands)

The Council discussed and approved a four-tier GST rate structure, as proposed by the Department of Revenue:

6% – Goods currently taxed below 9% (lower rate).

12% – Goods currently taxed between 9%–15%.

18% – Goods currently taxed between 15%–21%.

26% – Goods currently taxed above 21% (higher/de-merit rate).

Services to be taxed generally at 18%.

Cess mechanism approved for compensation funding on:

Luxury items and demerit goods such as tobacco, aerated drinks, pan masala, and luxury cars.

Clean Environment Cess on coal, peat, and lignite to continue.

Compensation Fund to be set up in the Public Account of India; cess proceeds to flow into it.

National Calamity Contingency Duty (NCCD) to continue for disaster relief.

Any surplus in the fund after five years to be devolved to States.

Suggested cess revenue target: about ₹51,552 crore annually (as shown in the table on page 20 of the minutes).

Key Policy Agreements

No inclusion of notional exemptions in revenue definition except for Special Category States.

CST compensation to remain limited to actual collections (2%) — no retrospective or notional rate increases.

Broad acceptance of consensus-driven decision-making for timely GST rollout before September 2017 deadline, and the Council reinforced its commitment to a unified and time-bound GST implementation.