Friday 30 October 2020

GST compensation eludes consensus at council meet

The council has decided to extend compensation cess beyond June 2022, said Finance Minister Nirmala Sitharaman after today's meeting

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The union and states today could not reach any consensus on the issue of borrowing to make up for compensation shortfall at the 42nd Goods and Services Tax (GST) Council meet. The GST Council has decided to meet again on 12 October. “10 states demand that full compensation should be paid to the states during the current year as per clauses in the law and centre should borrow. The decision was postponed to the next meeting on 12th of October,” Kerala finance minister Thomas Isaac said.

Commenting on the deferment of compensation, Ravishankar Raghvan (tax counsel with Majmudar & Partners) said, “I think the Indian government already has a very large borrowing requirement this year and any additional borrowing by the Centre may influence the yields on central government securities (g-secs) and have other macro-economic repercussions. Therefore, the compensation issue between Centre and States is likely to take some more time to be sorted out.”

The total shortfall in collection of GST is estimated at Rs 2.35 lakh crore, said Revenue Secretary Ajay Bhushan Pandey. Out of the total shortfall, Rs 97,000 crore is on account of GST shortfall, while the rest is due to COVID-19 pandemic. During the last meeting in August, the union government had presented two options before states to meet the GST shortfall.

The two options before states were

  1. A special window can be provided to the states, in consultation with the Reserve Bank of India, at a reasonable interest rate for the borrowing of Rs 97,000 crore. The amount can be repaid after five years (of GST implementation) ending 2022 from cess collection.
  2. The second option is to borrow the entire Rs 2.35 lakh crore shortfall under the special window.

Twenty-one states, mostly ruled by BJP or parties which have supported it on issues, had till mid-September opted to borrow Rs 97,000 crore to meet the GST revenue shortfall in the current fiscal. Opposition-led states like West Bengal, Punjab and Kerala have not yet accepted the borrowing option given by the Centre. “The states who have not written to the Prime Minister wanted the centre to borrow,” the minister said.

The dissenting states expect the Centre to borrow and compensate them. Kerala, Punjab and Delhi have asked for a dispute resolution mechanism to handle such differences.

So far, Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh have opted for the first borrowing option.

“This year’s compensation cess collected amounting to ₹20,000 crores will be disbursed to the states tonight,” finance minister Nirmala Sitharaman said. “GST Council has decided to extend compensation cess beyond June 2022,” the finance minister added.

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