GST Council fails to reach consensus on compensating States

Union Finance Minister Nirmala Sitharaman with MoS Anurag Thakur chair the 42nd GST Council meeting in New Delhi on October 5, 2020. Twitter/@FinMinIndia  

The Goods and Services Tax (GST) Council on Monday failed to iron out differences between Opposition-ruled States and the Centre over the plan to get States to borrow from the market to meet an estimated ₹2.35 lakh crore shortfall in compensation cess collections this year.

Following a “long-drawn”, fractious seven-hour meeting, Union Finance Minister Nirmala Sitharaman asserted that she did not take “anybody for granted” as alleged by some State representatives in the Council during Monday’s discussions.

Also read: GST Council meeting debates revenue shortfall of states

“We will not deny compensation dues to any State... borrowings have to be done and it has to be decided how much,” Ms. Sitharaman said, dismissing suggestions that States that don’t pick either of the two borrowing options offered by the Centre, could have to wait till next year to get any compensation.

The Council did agree to extend the levy of compensation cess under the GST regime, beyond the five-year period up to June 2022 as originally envisaged. The cess collections will be used to repay borrowings to be made this year for meeting the compensation shortfall, and will remain “for such period as may be required to meet the revenue gap”.

Also read: GST Council meeting | Kerala to reject two alternatives presented by Union government

Immediate funds

While the Council will meet again on October 12 to resolve the impasse, the Centre decided to release ₹45,000 crore of GST dues to States by next week to help them meet immediate spending needs amid the pandemic.

This includes ₹20,000 crore of GST compensation cess collected so far in 2020-21, which Ms. Sitharaman said will be disbursed to States by late Monday night itself.

The balance ₹25,000 crore pertains to Integrated GST dues from 2017-18 that had to be reconciled between States that got more than they ought to have and those that got less than their dues at the time.

Also read: FMs of Congress-ruled States not happy with outcome of GST Council meet

“So the Council cleared that borrowings will have to be done and repaid through the extended cess collection period… 20-21 States had written to us stating they will take the first borrowing option we had given. One State has proposed a third option to the Prime Minister. From among those who have not chosen any option, the argument is that the Centre should borrow instead of the States,” Ms. Sitharaman said.

While compensation cess collections this year are expected to be just around ₹65,000 crore, recompense due to States is around ₹3 lakh crore. The Centre had argued that ₹97,000 crore shortfall arises due to GST implementation itself, while the remaining ₹1.38 lakh crore is due to the impact of COVID-19.

Breakup revised

At Monday’s meeting, this calculation was revised with the Centre submitting that ₹1.10 lakh crore of the shortfall is due to GST implementation and the balance due to COVID-19. Under the first option offered to States, they can now borrow ₹1.1 lakh crore without impacting their borrowing limits or having to repay the loan or interest on it. Under the second option, States can borrow the entire ₹2.35 lakh crore shortfall.

Also read: GST Council meeting: Centre gives States two options for borrowing to meet revenue shortfall

The FM said interest repayments on ₹1.10 lakh crore borrowings would get the first charge on cess collected beyond June 2022. Of the rest, half would be used to repay the same loans’ principal and half will be used to repay the loans taken for cess shortfalls arising from the COVID-19 pandemic impact.

“Nobody anticipated COVID-19, not the lawmakers, not the GST Council. It is not as if the Centre is sitting on money and denying it to the States,” Ms. Sitharaman said, indicating that a few States called for a vote on the issue during the Council’s discussions.

There were some suggestions that States like Goa, Karnataka and Assam, which have agreed to the first borrowing option be allowed to go ahead, said the Minister. However, after Bihar Finance Minister Sushil Kumar Modi suggested that further discussions must be held with dissenting States, the Council decided to meet again on October 12.

Also read: Centre morally bound to compensate States for GST shortfall: Sushil Modi

High prices

For consumers, the extension of the compensation cess levy period would entail persistently high prices on such goods that attract the cess, said EY tax partner Abhishek Jain. “While an ad-hoc release of funds and an increased tenure should provide some comfort to States, the modus operandi on borrowings still remains a huge bone of contention without any consensus building up,” he added.

On the procedural front, the Council approved some changes so that the number of returns to be filed by smaller businesses are reduced from 24 to 8, starting January 1, 2021. Based on investigations of cases where taxpayers disappeared after claiming GST refunds, the Council has decided to restrict refunds to bank accounts validated by Aadhaar, while making Aadhaar authentication mandatory for all refund applications.

It was also decided to exempt 18% GST levied on satellite launch services offered by ISRO, Antrix Corporation Ltd and NSIL, in a bid to encourage startups that are making satellites to use domestic launching services instead of foreign players, Finance Secretary Ajay Bhushan Pandey said.

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Printable version | May 18, 2021 5:20:11 AM |

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