GST Council meeting: Centre vs States again on compensation issue

The Goods and Services Tax (GST) Council is meeting again today to discuss issues related to GST compensation. The meeting could see another round of confrontation between the NDA-ruled states and states ruled by other parties over the issue of constitutionally-mandated GST compensation for states.

The non-BJP ruled states have out-rightly rejected the Centre's proposal that mandates states to borrow to meet the revenue shortfall. These states have asked the Centre to set up a dispute settlement mechanism rather than going for a vote, and also borrow the funds to pay GST compensation to them. The opposition states have said they would move the Supreme Court in case the Centre put pressure on them and implement the proposal via voting.

Another option that's emerging is splitting the borrowing of funds between states and the Centre. These states are of the opinion that the Centre needs to find a common ground on the issue. The Centre had earlier come up with two distinctions on GST compensation to states for FY21 -- GST amount payable to states and revenue loss due to COVID-19 pandemic.

In the current fiscal, the states are staring at a staggering Rs 2.35 lakh crore GST revenue shortfall. Of this, about Rs 97,000 crore is on account of GST implementation and the rest Rs 1.38 lakh crore is the impact of COVID-19 on states' revenues. In August, the Centre gave two options to the states -- either borrow Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from the market.

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Notably, as many as 21 states have already opted for Option 1, under which states will be provided with a special window to borrow at rates at which the government of India borrows. The amount to be borrowed under the first option is the amount of compensation gap due to the implementation of GST.

All these issues could not be resolved at the 42nd GST Council meeting held on October 5. These issues were discussed throughout the day on October 5, but some states sought a third option, for which they wrote to the prime minister too.

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This amount was earlier calculated to be Rs 97,000 crore, however, after the inputs from many states, the same has been revised and now the amount that can be borrowed under option 1 is Rs 1.10 lakh crore.

The GST Council decided to extend the levy of compensation cess beyond the transition period of five years, that is, beyond June 2022, for such period as may be required to meet the revenue gap. The Council also decided to immediately release compensation cess of Rs 20,000 crore collected so far to States towards loss of revenue during 2020-21.

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