FM to chair 41st GST Council meeting today, states’ compensation on agenda : 27-08-2020

NEW DELHI: The Goods and Services Tax (GST) Council is set to meet today virtually to thrash out solutions for compensating states amid revenue shortfall. The special meeting, the first such to be held solely on the issue, will begin at 11 am.

While a number of solutions may be put on the table for bridging the compensation deficit, such as adding goods and services under the compensation cess ambit or increasing the tenure of payment to states beyond 2022, market borrowing will be the moot point of discussion between Centre and states.

States have backed a proposal that the Centre should borrow from the market and provide to states as it will get a lower rate and easier access to markets. More so, since Centre has to make good on its promise to states for paying the due compensation.

Centre, on the other hand, may tell states to borrow individually, relying on the opinion of the Attorney General that Centre is not liable to pay and that the decision lies with GST Council.

The Centre has said that the revenue loss in the current financial year is not because of GST implementation and that the Covid-19 pandemic be treated as an exception.

As per law, the GST Council shall compensate for loss of revenue emanating from implementation of GST, which is different from dual factors of economic slowdown and the Covid 19 pandemic that have impacted the tax collections across the country.

In the first four months of the fiscal, compensation cess collections have been 33% less than last year, at Rs 21,940 crore.

However, sources say that the states may agree with the Centre’s proposal for each state to borrow as long as the Centre provides the guarantee, along with the payment mechanism and interest.

More so since using Consolidated Fund of India for paying compensation to states was turned down by the Parliament, but the market borrowing option was kept open.

The GST compensation cess requirement stands at Rs 26,000 crore per month for FY 21 had arisen due to the unprecedented pandemic, nearly double of Rs 13,775 crore paid each month previous fiscal.

The GST (Compensation to States) Act mandates that the Centre compensates states for a five-year transition period for any potential loss in revenues due to implementation of the tax, which was rolled out on July 1, 2017.

The compensation calculation takes FY16 as the base year with a compounded annual growth rate (CAGR) of 14%.

They are paid from the GST Compensation Fund, to which the cess collections go. The Act, however, is silent how any shortfall will be tackled in case the fund falls short.

Source : Financial Express