On Friday, the GST Council is expected to discuss lowering the tax rate on Covid medications, vaccines, and medical equipment, as well as ways to make up for the income deficit provided to states.

Finance ministers from eight states run by non-BJP and like-minded parties, including Rajasthan, Punjab, Chhattisgarh, Tamil Nadu, Maharashtra, Jharkhand, Kerala, and West Bengal, have formulated a joint strategy to advocate for a zero tax rate on Covid basics ahead of the topmost decision-making body's first sitting, sources said.

The Council, which is chaired by Union finance minister Nirmala Sitharaman and comprises representatives from all states and union territories, is meeting for the first time in nearly eight months.

Aside from tax rates, the Council may also address the estimated Rs 2.69 lakh crore that states will need to make good on any revenue loss they experience as a result of giving up their right to levy VAT and other taxes, as promised in 2017.

Sources said the Fitment Committee on GST rates, comprising tax officers of Centre and states, has also given its report to the Council listing out the pros and cons of waiver and zero-rating of Covid vaccines, drugs and other equipment. Exempting final products from GST would deny manufacturers the option to claim the benefit of the input tax credit on raw materials and hence not much benefit accrues to consumers.

In 2018, the Council, following demands from various women's organisations, had exempted GST on sanitary napkins from an earlier rate of 12 per cent. However, not much of the rate cut benefits accrued to consumers as manufacturers could not claim the benefit of taxes paid along the supply chain.

Earlier this week, Punjab Finance Minister Manpreet Singh Badal, in a letter to Sitharaman, stated that many goods, like protective garments, digital thermometers, laboratory sanitisers/disinfectants, and paper bed sheets, which are needed to fight the Covid pandemic attract basic customs duty of 20 per cent and a Goods and Services Tax (GST) of up to 18 per cent.

On top of that, a 10 per cent social welfare surcharge is levied on such items. As IGST is charged on taxable value, which includes import duties, the effective burden exceeds by another 2-3 per cent, Badal said. "It is baffling that despite the crisis our country currently finds itself in... taxes this high continue to apply on basic essentials needed to overcome this life-threatening disease...," Badal said in the letter.

Earlier this month, Sitharaman virtually ruled out exempting Covid vaccines, medicines and oxygen concentrators from GST, saying such an exemption will make the lifesaving items costlier for consumers as manufacturers will not be able to offset the taxes paid on inputs.

Domestic vaccine supplies and commercial vaccine imports are subject to a 5 per cent GST, whereas Covid medicines and oxygen concentrators are subject to a 12 per cent tax. The shortfall in compensation due to states has been calculated by the Centre at Rs 2.69 lakh crore.

The Centre plans to acquire over Rs 1.11 lakh crore on luxury, demerit, and sin goods, which will be given to states to make up for the revenue shortfall caused by the introduction of GST. To satisfy the promised compensation, the remaining Rs 1.58 lakh crore will have to be borrowed.

According to the agenda note distributed to states ahead of the GST council meeting on Friday, the Centre estimates that, though GST revenues may recover this fiscal year, there would still be a shortfall between compensation needs and the amount received through cess.

GST revenues are expected to climb by 17 per cent in 2021-22, resulting in monthly gross GST revenue of Rs 1.1 lakh crore.

States were guaranteed bi-monthly compensation under the GST statute for any income loss in the first five years of the GST's implementation, beginning July 1, 2017.

The gap is calculated based on a 14 per cent annual increase in state GST collections over the base year of 2015-16.

The GST compensation cess would be extended beyond the initial five years of GST implementation, since states continue to confront revenue shortfalls as GST collections fell due to slowing economic activity, primarily due to Covid.