However, no decision was arrived at about the two borrowing options put forth by the Centre to states for which the GST council will meet again on October 12.

GST Council meeting on October 5 attended by FM
Money GST Compensation Monday, October 05, 2020 - 21:10

The Centre will disburse GST compensation cess amounting to Rs 20,000 crore to the state government on Monday night, Finance Minister Nirmala Sitharaman said. The decision was taken during the GST Council meet held on Monday. This is the compensation that has been collected so far this year, the FM said.

However, no decision was arrived at with regards to the two borrowing options put forth by the Centre to states. The GST council will meet again on October 12.

According to Kerala Finance Minister Thomas Isaac, 10 states demanded that full compensation should be paid to the states during the current year as per clauses in the law and that the Centre should borrow.

Addressing the media post the GST Council meeting, the Finance Minister said that 21 states had opted for option 1, while some states haven’t chosen any option and argued that the Centre should borrow.

“Coming to the end of the day, it was felt that you can’t decide based on the 21 states that wrote to you, and we need to talk further and gently reminded that I can’t take anybody for granted… I am not taking anyone for granted and I am open for more and more talk,” Sitharaman said.

At the meeting, FM Sitharaman also approved the extension of the GST compensation cess levy by two years till 2024. This levy will be reviewed from time to time and decided. 

Sitharaman also said that IGST dues worth Rs 24,000 crore will also be paid to the state governments by next week. This amount will be disbursed to states who earlier received less than they should.

“IGST of Rs 1.65 lakh crore as a quick resolution was divided into two halves and Rs 80,000 crore was given to states because there was no formula based on which IGST can be divided at the time. This created several anomalies where some states received more than they should have, and some received less than they should… For now, Rs 24,000 crore which has to go to states that got less will be given to them. But for states that received more, we are not asking them to pay back, it would be gradually retrieved from states,” the FM said while addressing the media

GST compensation issue

Under the existing GST Act, compensation for shortfall in GST collection is payable by the Centre for the first five years of the operations of the tax system — from July 2017 to June 2022.

Due to the economic slowdown exacerbated by the pandemic impacting collections, the Centre suggested to states in the previous GST council meeting that they borrow the GST compensation shortfall, giving them two options to do so.

Under the first option, the Centre said it would provide a special window to states to borrow Rs 97,000 crore at a reasonable rate of interest in consultation with the RBI.

Under this option, borrowing will not be treated as debt of the state and they would also be permitted to avail full additional borrowing limits given under Atmanirbhar Bharat package unconditionally. Also, interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of June 2022 and subsequently principal and interest will also be paid from proceeds of the cess, by extending the cess beyond the transition period.

The second option was that states could borrow the entire GST compensation gap of Rs 2,35,000 crore through a special window. Of this, Rs 97,000 crore is GST shortfall, while the rest is due to COVID-19 pandemic. 

However, states such as Kerala, Telangana, Punjab and Delhi opposed this, saying GST compensation is their right and wanted the Centre to borrow instead.

Twenty-one states had picked the first borrowing option proposed by the Centre to meet the GST revenue shortfall. This cleared decks for the GST Council to approve the new compensation mechanism and make it universally applicable across all states and Union Territories.

Finance Ministry sources told IANS that the GST Council, as per the GST Act, needs only 20 states to pass any resolution, in case voting is required on any issue. With 21 on board with the first option, this could well be considered for adoption by the Council.

The 21 states/UTs who opted for first option on GST compensation are: Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh.

With agency inputs

Watch to know what GST compensation is and why it is important to states